Software is eating the world, and virtually no company is unaffected by it. Companies that bring this to life have been rewarded with high valuation multiples that make fundraising easier, but they have capped returns lately as the sector’s six-month gain of 11.2% lagged the S&P 500’s 21%.
A cautious approach is imperative when venturing into these businesses, as the best will deliver robust profit growth while the rest will be disrupted by competition and AI. That said, here are three software stocks that we think can generate sustainable market returns.
Market cap: $52.42 billion
Zscaler (NASDAQ:ZS) pioneered the zero trust approach that has fundamentally changed enterprise network security, offering a cloud-based security platform that securely connects users, devices and applications without traditional network-based security hardware.
Why do we love ZS?
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Last year’s ARR trends show that the company maintains a steady stream of long-term contracts that contribute positively to revenue predictability
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The sales outlook for the next twelve months implies that the company will remain on its desirable two-year growth trajectory
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Strong free cash flow margin of 27.2% enables consistent reinvestment or return of capital
At $330.29 per share, Zscaler trades at a forward price-to-sales of 15.8x. Is this the right time to buy? Find out for yourself in our full research report, it’s free for active Edge members.
Market cap: $149.1 billion
Founded in 2005 by security visionary Nir Zuk, who set out to reinvent firewall technology, Palo Alto Networks (NASDAQ:PANW) offers AI-powered cybersecurity platforms that protect organizations’ networks, clouds and endpoints from advanced threats.
Why is PANW interesting?
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Solid annual revenue growth of 22% over the past five years underlines the software’s appeal to businesses
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Fast payback times on sales and marketing costs allow the company to invest heavily while attracting many customers
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PANW is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Palo Alto Networks’ stock price of $219.45 implies a valuation ratio of 14.9x forward price-to-sales. Is now a good time to buy? Find out in our full research report. It’s free for active Edge members.
Market cap: $1.74 billion
Olo (NYSE:OLO) processes more than two million orders daily at 80,000 restaurant locations nationwide and provides an enterprise-grade SaaS platform that powers digital ordering, delivery and payment systems for restaurant brands in the United States.
