We recently compiled a list of the 12 Best Software Stocks to Buy According to Analysts. In this article, we are going to take a look at where StoneCo Ltd. (NASDAQ:STNE) stands against the other software stocks.

Software Industry Update

According to the MCF Corporate Finance Q4 2024 software update report, software company valuations have reached unprecedented heights due to the AI boom, especially with innovations surrounding GenAI. Investors are increasingly viewing strong AI roadmaps as essential for revenue and margin expansion, leading to heightened interest in software companies that integrate advanced AI capabilities into their offerings. According to the report, software companies are trading at 6.2x the Current median EV / NTM revenue estimate.

As highlighted by the report, another key reason for increased valuations has been the high adoption rate of GenAI. The enterprise-level usage of GenAI almost doubled year-over-year in 2024 and around 65% of the enterprises now use the technology. The report noted that organizations have now transitioned from the pilot testing phase to full-scale GenAI implementations, enhancing workflows and customer experiences while unlocking new revenue streams. Moreover, the investment and funding for GenAI-based software companies also increased sharply. According to the report GenAI raised around $56 billion in funding in 2024, driven by a $10 billion round of DataBricks, a $6.6 billion round by OpenAI, and a $4 billion round of Anthropic. Not only this, GenAI also claimed more than 40% of the total AI funding across the United States, Europe, and Israel.

Talking about how AI has started to play in the favor of software, Jeff Richards, managing partner at Notable Capital appeared on a CNBC interview a month ago. He noted that AI is actively working for the software sector, indicating that the technology is not just a prospect but is already being utilized effectively in various applications within the industry. Richards highlighted that the development of AI which started with semiconductor chips, then moved to data centers and servers is now in the software development stage where software application companies are in high demand to integrate AI applications in various industries. Similar to the findings by the MCF corporate finance report, Richards also highlighted that venture capital funds have been heavily funding software startups for the past two to three years to ensure the effective application of GenAI, which we are witnessing right now.

Our Methodology

To curate the list of the 12 best software stocks to buy according to analysts, we used the Finviz stock screener and CNN. Using the screener we first aggregated a list of software stocks with analyst upside potential of more than 50%. Next, we cross-checked the analyst upside potential for each stock using CNN. Lastly, we ranked these stocks in ascending order of analysts’ upside potential. We have also added the number of hedge funds holding each stock, sourced from Insider Monkey’s third-quarter hedge funds database. Please note that the data was recorded on January 16, 2025.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

StoneCo Ltd. (NASDAQ:STNE)

Stock Price: $8.74

Number of Hedge Fund Holders: 22

Analyst Upside Potential: 73.38%

StoneCo Ltd. (NASDAQ:STNE) specializes in financial technology and software solutions that help small and medium-sized businesses manage their payments effectively. Its financial solutions include point-of-sale systems, online payment gateways, digital banking, and credit solutions. Its software solutions include customer relationship management and enterprise resource planning solutions making it a comprehensive partner for businesses.

In 2024, they plunged 52.02% due to the mishap of unreliable government data usage for client creditworthiness assessment. However, regardless of the decline in stock price the company demonstrated progress towards its strategic goals and maintained its market position. During the fiscal third quarter of 2024, StoneCo Ltd. (NASDAQ:STNE) achieved a record take rate for Micro, Small, and Medium Businesses (MSMBs) of 2.58%. As a result its Total Payment Value for MSMBs for the third quarter also increased by 23% on a year-to-date basis.

The investment case for the company remains strong as it operates in the emerging market of Brazil which is on its way to becoming cashless due to booming mobile technology. According to DigitalPortal Brazil 2024 report more than 210 million cellular connections occurred last year indicating the strong adoption of mobile technology.

Ave Maria World Equity Fund stated the following regarding StoneCo Ltd. (NASDAQ:STNE) in its fourth quarter 2023 investor letter:

“StoneCo Ltd. (NASDAQ:STNE) provides solutions that enable merchants and integrated partners to conduct electronic commerce seamlessly across in-store, online, and mobile channels in Brazil. StoneCo has faced near-term operational challenges because of the pandemic and high levels of inflation in Brazil. The company appears to be moving past these challenges and it appears that the successful integration of the newly acquired software business with its payments business will drive substantial shareholder value longer term.”

Overall STNE ranks 5th on our list of the best software stocks to buy according to analysts. While we acknowledge the potential of STNE as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than STNE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.

Disclosure: None. This article is originally published at Insider Monkey.