In this article, we will take a look at the 12 high growth software stocks that are profitable.
When it comes to investing, the software industry is notorious because you will find the industry littered with companies that are unprofitable, with huge valuations and promises of returns that remain elusive, especially in the current environment. However, the start of 2023 infused a strange optimism in the market that started to attract investors towards risky assets. According to a Bloomberg report published on February 8, a group of unprofitable tech stocks tracked by Goldman Sachs was up 28% in the year. The AI mania that started with the launch of ChatGPT also helped several software and AI stocks this year.
Beyond the “Junk Rally”
However, the market rally is turning out to be fickle as several important data points suggest the Federal Reserve has a long way to go in its fight against inflation. The Bloomberg report cited Jim Smigiel, chief investment officer at SEI Investments Co., who called the market optimism as “junk rally.”
“This is massive speculation, and it is going to burn itself out quickly because there are no fundamental drivers behind it,” Smigiel reportedly said.
The report also quoted Irene Tunkel, chief strategist of US equity strategy at BCA Research, who said that the rally was “speculative exuberance” and was not sustainable.
“Too many things have to go right for the rally to continue at this pace, and that’s offset by the probability that the gains will reverse and you’ll lose your capital,” Tunkel said, according to Bloomberg.
In this scenario, it’s better to take a step back and focus on profitable companies that have solid fundamentals. The software industry has a huge growth potential as companies and governments around the world invest in the space and embrace digital platforms, Cloud and cybersecurity.
Our Methodology
For this article, we used the Finviz stock screener to identify profitable software companies which have over 10% of sales growth on a quarter-over-quarter basis and over 20% sales growth over the past five years.
High Growth Software Stocks that are Profitable
12. National Instruments Corporation (NASDAQ:NATI)
Number of Hedge Fund Holders: 17
Shares of automated test equipment and virtual instrumentation software company National Instruments Corporation (NASDAQ:NATI) have gained about 27% over the past one year. In January, National Instruments Corporation (NASDAQ:NATI) posted Q4 results that did not meet expectations. Revenue in the quarter jumped 6.5% YoY.
For the first quarter of 2023, National Instruments Corporation (NASDAQ:NATI) said it expects GAAP revenue to come in the range of $415 million to $445 million. This revenue figure, at the midpoint of the mentioned range, will show YoY growth of about 12%.
In January, Emerson Electric Co (EMR.N) disclosed an offer of about $7 billion to buy National Instruments Corporation (NASDAQ:NATI).
11. Agilysys, Inc. (NASDAQ:AGYS)
Number of Hedge Fund Holders: 17
Agilysys, Inc. (NASDAQ:AGYS) makes software for the hospitality industry. Over the past year Agilysys, Inc. (NASDAQ:AGYS) has doubled in value. During the third quarter, Agilysys, Inc. (NASDAQ:AGYS)’s revenue saw growth of about 26.5% on a YoY basis. Adjusted EPS in the period came in at $0.26, beating estimates by $0.05. For the full-year 2023, Agilysys, Inc. (NASDAQ:AGYS) expects its revenue to come in between $190 million to $195 million, versus the consensus estimate of $194.57 million.
10. SPS Commerce, Inc. (NASDAQ:SPSC)
Number of Hedge Fund Holders: 19
Cloud-based supply chain management software company SPS Commerce, Inc. (NASDAQ:SPSC) ranks 10th in our list of high growth software stocks that are profitable. On a year-to-date basis SPS Commerce, Inc. (NASDAQ:SPSC) has gained about 18% through February 16. Earlier this month, SPS Commerce, Inc. (NASDAQ:SPSC) reported its fourth-quarter results, according to which it saw revenue growth of about 19% in the period. SPS Commerce, Inc. (NASDAQ:SPSC)’s revenue of $122 million beat analyst estimates by $1.22 million. Adjusted EPS in the quarter was $0.63, beating forecasts by $0.09.
Adjusted EBITDA in the period jumped 26% to $35.0 million compared to the year-ago period.
At the end of the third quarter of 2022, 19 hedge funds in Insider Monkey’s database of hedge funds had stakes in SPS Commerce, Inc. (NASDAQ:SPSC).
Conestoga Capital Advisors made the following comment about SPS Commerce, Inc. (NASDAQ:SPSC) in its Q3 2022 investor letter:
“SPS Commerce, Inc. (NASDAQ:SPSC): SPSC has benefitted from being truly omni-channel and agnostic to where people shop. This contrasts with some software peers that derive revenue just online channels. SPSC beat revenue and earnings expectations for the second quarter and increased their full year guidance. Strength was broad-based with fulfillment consistent with 17% growth and analytics growth accelerating to 12%. SPSC is also benefiting from the industry looking to streamline supply chains and from digital transformations.”
9. Calix, Inc. (NYSE:CALX)
Number of Hedge Fund Holders: 24
Calix, Inc. (NYSE:CALX) ranks 9th in our list of high growth software stocks that are profitable. During the fourth quarter Calix, Inc. (NYSE:CALX)’s revenue saw an increase on 38.6% on a YoY basis. Net income in the quarter came in at $11.93 million. Calix’s cash and cash equivalents totaled $79.07 million.
Out of the 24 hedge funds that had stakes in Calix, Inc. (NYSE:CALX) as of the end of the third quarter of 2022, Richard Driehaus’s Driehaus Capital was the biggest stakeholder, with a stake worth about $104 million.
Carillon Tower Advisers made the following comment about Calix, Inc. (NYSE:CALX) in its Q3 2022 investor letter:
“Another strong performer during Q3 was Calix, Inc. (NYSE:CALX). Calix stock rebounded sharply in the quarter after reporting stellar earnings. They offer next-gen fiber broadband solutions to telecommunication companies primarily for rural markets. The broadband buildout in rural markets is still in the early innings, and the company’s subscription model offers great visibility going forward.”
8. Qualys, Inc. (NASDAQ:QLYS)
Number of Hedge Fund Holders: 25
Shares of IT security and compliance platform company Qualys, Inc. (NASDAQ:QLYS) have gained about 5% so far in 2023 through February 16. Qualys, Inc. (NASDAQ:QLYS)’s fourth quarter results show that the company saw a 19.2% YoY growth in revenue. Non-GAAP EPS in the quarter came in at $1.01, surpassing estimates by $0.11.
Qualys, Inc. (NASDAQ:QLYS) also announced a $100 million increase in its share buyback program. For the fiscal first quarter of 2023, Qualys, Inc. (NASDAQ:QLYS) is expecting its revenue to come in between $130.2 million to $131 million, which will show YoY growth of 15%-16%.
A total of 25 hedge funds tracked by Insider Monkey had stakes in Qualys, Inc. (NASDAQ:QLYS) as of the end of the third quarter of 2022. The biggest stakeholder of Qualys, Inc. (NASDAQ:QLYS) during this period was Terry Smith’s Fundsmith LLP which owns a $92 million stake in the firm.
Polen Capital made the following comment about Qualys, Inc. (NASDAQ:QLYS) in its Q4 2022 investor letter:
“Qualys, Inc. (NASDAQ:QLYS) is a provider of cloud-based cybersecurity software primarily focused on the vulnerability management segment. While the company has outperformed year to date, it experienced weakness after reporting earnings results and given investors’ concerns over decelerating billings growth and lower-thanexpected fourth-quarter guidance. While the market was disappointed, these results were in-line with our expectations, and we still believe Qualys’s growth is impressive and presents an attractive long-term opportunity for investors.”
7. Manhattan Associates, Inc. (NASDAQ:MANH)
Number of Hedge Fund Holders: 26
Supply chain software company Manhattan Associates, Inc. (NASDAQ:MANH) shares have gained about 21% year to date in 2023 through February 16. Earlier this month Manhattan Associates, Inc. (NASDAQ:MANH) posted its fourth quarter results. Adjusted EPS in the quarter came in at $0.81, beating consensus estimates by $0.31. The software company’s revenue in the quarter increased by about 15.5% on a YoY basis to reach $198.1 million, beating estimates by $15.32 million. Adjusted operating income in the quarter totaled $59.9, much better than $39.1 million posted in the comparable quarter of 2021. Manhattan Associates, Inc. (NASDAQ:MANH)’s cash flow from operations in the period was $55.2 million, compared to $40.1 million for the fourth quarter of 2021.
At the end of the third quarter of 2022, 26 hedge funds tracked by Insider Monkey reported owning stakes in Manhattan Associates, Inc. (NASDAQ:MANH).
Brown Capital Management made the following comment about Manhattan Associates, Inc. (NASDAQ:MANH) in its Q3 2022 investor letter:
“Manhattan Associates, Inc. (NASDAQ:MANH) provides supply-chain-management software and services. For retailers, wholesalers, and manufacturers, the company’s products increase supply chain visibility to improve asset turnover, reduce costs and uncertainty on when goods will be delivered. The market for supply-chain software has risen steadily over recent years and Manhattan has been a beneficiary of this increased demand.
The company continues to generate strong revenue growth from its Cloud and Services offerings. During the second quarter, Cloud subscription revenue grew 48% year over year while Services revenue grew 19%. Existing and new customers are responding positively to the company’s new product launches. Additionally, increasing revenue from Cloud buyers against its historical investment in the cloud infrastructure is poised to expand the segment’s operating margins in the years to come. Manhattan should also benefit from other tailwinds, including supply-chain digitalization, an increased focus on fulfillment and Manhattan’s new omni-channel software offering. We met with Manhattan Associates’s management team in September. After discussing the company’s product development roadmap and its approach to solving customer challenges, we were convinced the company has many years of attractive growth remaining. Despite our enthusiasm, we did modestly reduce our position size in response to our internal risk controls on position sizing.”
6. CDW Corporation (NASDAQ:CDW)
Number of Hedge Fund Holders: 34
Illinois-based CDW Corporation (NASDAQ:CDW) makes application software for small businesses operating in several industries, including retail and finance. CDW Corporation (NASDAQ:CDW) has gained about 15% year to date through February 16. According to WSJ, the firm’s sales growth as of 2022 is about 14%. CDW Corporation (NASDAQ:CDW) is one of the dividend-paying technology stocks. Earlier in February, CDW Corporation (NASDAQ:CDW) declared a quarterly dividend of $0.59 per share. Forward dividend yield came in at 1.18%. The dividend is payable on March 10 to shareholders of record as of February 24. CDW Corporation (NASDAQ:CDW) also said its board of directors approved a $750 million boost to CDW’s share buyback program.
34 hedge funds in Insider Monkey’s database of elite hedge funds had stakes in CDW Corporation (NASDAQ:CDW) at the end of the third quarter of 2022. The total value of these stakes was about $1.7 billion. The biggest stakeholder of CDW Corporation (NASDAQ:CDW) during this period was Robert Joseph Caruso’s Select Equity Group which reported owning about 7.1 million shares of the company at the end of the September quarter.
Here is what Wedgewood Partners has to say about CDW Corporation (NASDAQ:CDW) in its Q3 2022 investor com:
“CDW contributed to performance during the quarter after logging +19% currency-neutral revenue growth and +26% operating earnings growth. The Company’s “omni-office” strategy of outfitting small and medium businesses with software, hardware and services, wherever workers decide or need to work continues to resonate. CDW organizes itself across several end-markets, with each of these end markets at different stages of building out their omni-office presences. In the meantime, the post-Pandemic IT environment has quickly evolved from supply scarcity (due to vendor shortages and strong demand) where CDW flexed its balance sheet to ensure inventory availability, to more recently helping customers manage never before seen levels of complexity related to a work-from-every-where workforce. CDW’s consistent returns, cheap multiple, and mission-critical functions it offers to vendors and customers continues to be an attractive risk-reward for portfolios.”
5. Dynatrace, Inc. (NYSE:DT)
Number of Hedge Fund Holders: 35
Software intelligence platform company Dynatrace, Inc. (NYSE:DT) ranks 5th in our list of the 12 high growth software stocks that are profitable. Dynatrace, Inc. (NYSE:DT) recently posted its fiscal third quarter results. Dynatrace, Inc. (NYSE:DT) said adjusted EPS in the quarter came in at $0.25, beating estimates by $0.04. Revenue in the quarter increased by 23.6% on a YoY basis to come in at $297.46 million, beating estimates by $12.71 million. Dynatrace, Inc. (NYSE:DT)’s subscription revenue in the period increased by 29% in the period on a constant currency basis. Operating income in the period was $34 million.
For the fiscal fourth quarter, Dynatrace, Inc. (NYSE:DT) expects revenue in between $304 million to $307 million, versus the consensus estimate of $291.90 million. Adjusted EPS in the period is expected to come in between $0.22 and $0.23, better than the consensus of $0.21
35 hedge funds reported having stakes in Dynatrace, Inc. (NYSE:DT) at the end of the third quarter of 2022, according to Insider Monkey’s proprietary database.
Polen Capital made the following comment about Dynatrace, Inc. (NYSE:DT) in its Q3 2022 investor letter:
“The most significant absolute detractors from the Portfolio’s performance over the quarter included Yeti, Goosehead Insurance, and Dynatrace, Inc. (NYSE:DT).
Finally, Dynatrace, a software provider of intelligence platform solutions that allow customers to modernize and automate IT operations, traded down in the quarter as the company provided cautious guidance given the uncertainty around the macro picture. We think this is reasonable considering the wider range of outcomes in this market environment, and the underlying results spoke to a company that continues to execute at a high level.”
4. WEX Inc. (NYSE:WEX)
Number of Hedge Fund Holders: 37
Payment solutions company WEX Inc. (NYSE:WEX) ranks 4th in our list of the high growth software stocks that are profitable. WEX Inc. (NYSE:WEX)’s revenue in the fourth quarter of 2022 jumped by about 24.3% on a YoY basis to come in at $618.6 million, beating estimates by $41.59 million. Adjusted EPS in the quarter was $3.44, beating estimates by $0.22.
In the first quarter of 2023, WEX Inc. (NYSE:WEX) is expecting to generate revenue in the range of $600 million to $610 million, versus the consensus estimate of $569.52 million. Adjusted net income in the period is expected to come in between $140 million to $145 million, or $3.15 to $3.25 per diluted share, while the consensus estimate for this figure is $3.20.
3. Cadence Design Systems, Inc. (NASDAQ:CDNS)
Number of Hedge Fund Holders: 46
Computational software and hardware company Cadence Design Systems, Inc. (NASDAQ:CDNS) is in the spotlight after the company posted upbeat Q4 results earlier this month. Cadence Design Systems, Inc. (NASDAQ:CDNS)’s revenue during the fourth quarter of 2022 saw an increase of about 16.4% on a YoY basis to reach $899.88 million, beating estimates by $15.65 million.
Cadence Design Systems, Inc. (NASDAQ:CDNS)’s management expressed confidence in Cadence’s secular growth prospects stemming from AI, machine learning, 5G and hyperscale computing.
Hedge fund sentiment for Cadence Design Systems, Inc. (NASDAQ:CDNS) also ticked up in Q3 of 2022. At the end of the quarter, 46 hedge funds out of the 920 hedge funds tracked by Insider Monkey had stakes in Cadence Design Systems, Inc. (NASDAQ:CDNS), up from 39 hedge funds in the previous quarter. The most notable stakeholder of the company was Panayotis Takis Sparaggis’ Alkeon Capital Management which owns a $523.4 million stake in Cadence Design Systems, Inc. (NASDAQ:CDNS).
Renaissance Investment made the following comment about Cadence Design Systems, Inc. (NASDAQ:CDNS) in its Q3 2022 investor letter:
“Cadence Design Systems, Inc. (NASDAQ:CDNS) was another contributor. The company reported strong operating results with broad-based strength from its semiconductor customers who are migrating to next-generation manufacturing nodes. We believe the multi-year investment cycle for semiconductor design spending should drive sustainable double-digit growth well into next year.”
2. Oracle Corporation (NASDAQ:ORCL)
Number of Hedge Fund Holders: 67
Oracle Corporation (NASDAQ:ORCL) is one of the most notable Cloud and software stocks. In December, Oracle Corporation (NASDAQ:ORCL) posted its fiscal second quarter results. Adjusted EPS in the quarter came in at $1.21, beating estimates by $0.04. Revenue in the quarter jumped about 18.5% on a YoY basis to a total of $12.28 billion, beating estimates by $260 million. Oracle Corporation (NASDAQ:ORCL) said its Cloud revenue in the quarter jumped a whopping 48% (constant currency) on a YoY basis to total $3.8 billion.
In January, Oracle Corporation (NASDAQ:ORCL) jumped after Piper Sandler analyst Brent Bracelin upgraded the stock to Overweight, citing strengths in the Cloud market, which he now believes could reach $646 billion by 2025 and $1.4 trillion by 2030.
1. Intuit Inc. (NASDAQ:INTU)
Number of Hedge Fund Holders: 86
Business software company Intuit Inc. (NASDAQ:INTU) ranks 1st in our list of the 12 high growth software stocks that are profitable. In November Intuit Inc. (NASDAQ:INTU) posted its fiscal first quarter results. Revenue in the quarter increased by about 29.4% on a YoY basis to come in at $2.6 billion, beating estimates by $100 million. Adjusted EPS in the quarter was $1.66, beating estimates by $0.46. Intuit Inc. (NASDAQ:INTU) said that for full-year 2020 it expects revenue in the range of $14.035 billion to $14.250 billion, which will show growth of about 10%-12%. The consensus estimate for this figure was $14.54 billion.
As of the end of the third quarter of 2022, 86 hedge funds reported owning stakes in Intuit Inc. (NASDAQ:INTU), significantly up from 75 hedge funds in the previous quarter. This shows that hedge fund sentiment for Intuit Inc. (NASDAQ:INTU) is positive.
Fundsmith made the following comment about Intuit Inc. (NASDAQ:INTU) in its 2022 yearly investor letter:
“Take the example of Microsoft and Intuit Inc. (NASDAQ:INTU). Microsoft shares are currently being valued at a P/E ratio of 25.0 times the consensus EPS estimate for the fiscal year ending June 2023. Meanwhile, Intuit is being valued at 28.4 times the non-GAAP consensus estimate for the fiscal year ending July 2023. Many investors and analysts may accept that Intuit is trading at a higher multiple given expectations of greater growth potential. However, Intuit removes share-based compensation from their non-GAAP EPS whereas Microsoft does not. Given that Intuit’s GAAP EPS guidance for the year ending 31st July 2023 is $6.92–$7.22, its non-GAAP guidance is $13.59–$13.89, and the consensus estimate for 2023 EPS is at $13.69, it seems clear that most sell-side analysts are accepting the company’s non-GAAP adjustments, which includes the removal of some $1.8bn of share-based compensation, in their estimates. If we include the impact of share-based compensation in Intuit’s 2023 EPS to make a more apples-to-apples comparison with Microsoft based upon GAAP EPS, Intuit’s 2023 EPS would be closer to $9, meaning that the shares would be trading at a multiple of about 43 times. I think investors and analysts may find a premium of 14% for Intuit over Microsoft (28.4 times versus 25.0 times) to be reasonable. I’m not so sure they are fully aware that Intuit shares are actually trading at a premium of 73% if share-based compensation is treated in the same manner between the two companies.
Many investors and analysts, including us, look to cash flow metrics more than accrual profits. Unfortunately, share-based compensation may cause distortions in cash flow metrics as well, even when they follow GAAP. Under GAAP, share-based compensation is added back in the cash flow from operating activities, which in turn is used in the computation of free cash flow. ..” (Click here to read the full text)
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Disclosure: None. 12 High Growth Software Stocks that are Profitable is originally published on Insider Monkey.
