Being one of Reddit favorites, shares of software company BlackBerry Limited (BB) soared to hit its 52-week high of $28.77 on January 27, 2021. In fact, the stock rallied 103.8% year-to-date and 59.1% over the past month. However, BB is currently trading at an expensive valuation which doesn’t justify its fundamentals. In terms of forward EV/EBITDA, BB’s 159.50x is 835.3% higher than the industry average of 17.05x. Its forward P/CF of 75.06x is 227.3% higher than the industry average of 22.93x. So, they could be due for a pullback.
While BB may not be a good bet right now, the solid growth prospects of the software industry owing to increasing demand for advanced software in almost every industry should drive the performance of many fundamentally-sound software stocks in the near term. According to Grand View Research, the global business software and services market is expected to grow at a CAGR of 11.3% between 2021 and 2028.
So, it’s wise to bet on established software companies such as Microsoft Corporation (MSFT) and VMware, Inc. (VMW) that have solid financials and are expected to generate significant returns in upcoming months.
Microsoft Corporation (MSFT)
Tech giant MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. Its offerings range from Microsoft Teams, Office 365 Security and Compliance to Xbox hardware, and Xbox content and services in the gaming segment. It has strategic collaborations with several companies such as DXC Technology (DXC), Dynatrace, Inc. (DT), Morgan Stanley (MS), and Micro Focus (MFGP).
On April 12, 2021, MSFT and Nuance Communications, Inc. (NUAN) announced that they have entered into a definitive agreement under which MSFT will acquire NUAN. Consequently, MSFT’s product portfolio might be expanded combining solutions and expertise to deliver new cloud and AI capabilities across healthcare and other industries.
MSFT’s revenue increased 19% year-over-year to $41.70 billion for the fiscal third quarter that ended March 31, 2021. Its operating income grew 31% year-over-year to $17 billion. Its non-GAAP net income came in at $14.80 billion, which represents a 38% year-over-year increase. MSFT’s non-GAAP EPS came in at $1.95, up 39% year-over-year.
For fiscal 2021, analysts expect MSFT’s EPS to come in at $7.77, which represents a 34.9% year-over-year increase. It surpassed the consensus EPS estimates in each of the trailing four quarters. The company’s revenue is expected to increase 19% year-over-year to $42.51 billion for the quarter ending September 30, 2021. The stock has gained 34.3% over the past year to close yesterday’s trading session at $260.90.
MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall grade of B, which equates to a Buy rating in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. It has a B grade for the Stability, Sentiment, and Quality components.
We have also graded MSFT for Growth, Momentum and Value. Click here to access all of MSFT’s ratings. MSFT is ranked #13 out of 128 stocks in the Software - Application industry.
Click here to check out our Software Industry Report for 2021
VMware, Inc. (VMW)
One of the leading companies in the cloud infrastructure space, VMW provides software in the areas of hybrid and multi-cloud, modern applications, networking, security, and digital workspaces internationally. It provides VMware multi-cloud solutions including vSphere, vSAN and VxRail, vRealize Cloud Management solutions and VMware Cloud Foundation.
The company announced on April 14, 2021 that a Special Committee of independent directors and Dell Technologies Inc. (DELL) have agreed to terms in which VMW will be spun-off from DELL. This is expected to help VMW provide it with increased strategic, operational and financial flexibility, and agility to drive its growth strategy while maintaining its alliance with DELL.
VMW’s revenue increased 9% year-over-year to $2.99 billion for the fiscal first quarter that ended April 30, 2021. Its non-GAAP operating income grew 13% year-over-year to $923 million. Its non-GAAP net income came in at $744 million, which represents a 16.2% year-over-year increase. The company’s non-GAAP EPS came in at $1.76, up 15.8% year-over-year.
Analysts expect its EPS to increase 9.8% year-over-year to $7.63 in fiscal 2023. It surpassed Street EPS estimates in three of the trailing four quarters. Its revenue is expected to increase 9% year-over-year to $12.83 billion in fiscal 2022. The stock has rallied 11.9% year-to-date to close yesterday’s trading session at $156.95.
VMW’s POWR Ratings reflect this promising outlook. The company has an overall grade of B, which translates into Buy rating in our proprietary ratings system. The stock has an A grade for Quality, and a B grade for Value as well.
Within the Software - Business industry, VMW is ranked #7 out of 59 stocks. To see the additional POWR Ratings grades for VMW (Stability, Growth, Sentiment and Momentum), click here.
BB shares were trading at $12.72 per share on Friday afternoon, down $0.79 (-5.85%). Year-to-date, BB has gained 91.86%, versus a 11.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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