3 Software Plays Showing Signs of Recovery

It’s been a challenging year for most software stocks. 

Concerns about IT budgets being pared back amid rising global economic uncertainty have slashed software company market values in 2022. Those that are unprofitable have seen the most dramatic recalibrations.

Thankfully, the worst may be over.

Last month the S&P North American Expanded Technology Software Index was down as much as 33% from where it began the year. Since then it has rallied 10% on hopes that a less aggressive Fed can calm inflation, navigate a smooth economic landing, and revive software spending.

Some software plays have staged particularly convincing rebounds that suggest it’s uphill from here. Let’s look at three of the biggest moves that are helping the software group hit the reset button.

Is Salesforce Stock in an Uptrend? 

Salesforce, Inc. (NYSE: CRM) has bounced 20% off its bottom and done so in high volume fashion. Last week’s first quarter earnings report was the accelerant.

The customer relationship management SaaS provider outperformed its own revenue and EPS expectations in addition to those of the Street. The unlikely double beat was driven by contributions from all business units, including the recently acquired Slack which chipped in $344 million in revenue. 

What is even more encouraging than the recent financial results is the fact that Salesforce is hiring like crazy. It expanded its workforce by 30% in the quarter ended April 30th in anticipation of strong demand for cloud-based CRM solutions across industries. New offerings that cater to the mobile, data analytics, artificial intelligence (AI), and social networking markets are poised to be the biggest growth drivers. 

The most compelling narrative from a long-term perspective is Salesforce’s expansion of its addressable market. It is doing so by launching new products and introducing extensions of existing products, thereby generating cross-sell opportunities. Meanwhile, brand new markets are being entered through M&A activity including buyouts of Slack, Tableau, and MuleSoft. 

At the midpoint, management’s projection for current year adjusted EPS imputes a 39x multiple. While far from cheap, it may be a price worth paying given Salesforce's exposure to an expanding lineup of growth opportunities.

Is Autodesk Stock a Buy?

Autodesk, Inc. (NASDAQ: ADSK) also gapped up on the heels of a strong first-quarter report. The trading volume wasn’t as powerful as in the case of Salesforce, but with the stock still approximately 40% below last year’s peak there could be plenty of upside.

The maker of AutoCAD and other design software turned in 39% profit growth in Q1, handily topping its own guidance and the analyst consensus. Like Salesforce, the performance was driven by broad-based strength which tells investors that Autodesk is experiencing steady demand across all end markets—and lacks a weak segment that can sometimes limit a stock’s potential. In addition to AutoCAD, its Architecture, Construction, and Engineering (AEC), Manufacturing, and Media segments are all starting the new fiscal year on the right foot.

Autodesk lowered its full-year guidance due to the effects of the strong dollar, a software industry trend that started with similar verbiage from Microsoft last month. Foreign exchange headwinds are of particular concern to Autodesk because two-thirds of sales come from outside the U.S.

While the new projection of $5 billion in FY23 revenue isn’t as much as some had predicted, it still implies 12% growth. More importantly, Autodesk has the demand and pricing power to drive another big jump in earnings. Sell-side firms are estimating 32% profit growth this year. The vast majority are calling the stock a buy with most price targets near $300. 

Is Paylocity Stock Worth the Premium Valuation?

Paylocity Holding Corporation’s (NASDAQ: PCTY) slide from the $300 level may finally be winding down. Shares of the payroll and HR software provider have rebounded 19% from last month’s low and regained their 50-day moving average in above-average volume.

Another bullish sign is that Paylocity’s cloud solutions are gaining traction with small businesses. Tools like Paylocity Web Pay, HR, and Impression are helping drive efficiencies and improved employee engagement for more than 25,000 U.S. businesses as they recover from the pandemic.

Paylocity is on pace to generate at least 40% profit growth in its current fiscal year after recording 13% bottom-line growth last year. The acceleration is a reflection of the company’s leading position in payroll processing and human capital management (HCM) software, one that has been fortified by continuous innovation and new product launches. 

Lately, the stock price hasn’t reflected this strength due to the impact of a potential recession on small businesses and increasing competition from major industry players like ADP and Paychex. The lofty P/E ratio has also been a headwind.

Until this year, investors haven’t minded paying a premium for Paylocity. As some of the near-term pressures subside, the stock could once again command the 60x-plus multiple that reflects its dominance in the space and long growth runway.