3 Lesser-Known Software Stocks with Buy Ratings

The software industry has been one of the biggest beneficiaries of the COVID-19 pandemic, playing a vital role in virtually all aspects of the remote lifestyle. And with the  significant rise in productivity and decline in costs delivered by the remote working structure, companies are now planning to adopt hybrid working models permanently, allowing employees to clock in from their homes for most workdays. Consequently, spending on software and technology infrastructure is increasing. The global software industry market is expected to grow at a CAGR of 7.4% over the next five years to hit $772 billion by 2025.

However, the biggest software companies have reached saturation levels. Most MNCs already have long standing partnerships with them. In contrast, SMEs and relatively smaller companies are opting for more affordable services from lesser-known software companies.

Thus, lesser-known companies, such as Synopsys, Inc. (SNPS), Cadence Design Systems, Inc. (CDNS) and Amdocs Limited (DOX) have taken  steps to expand their market reach, and we expect them to perform better than their well-known counterparts in the near term.

Synopsys, Inc. (SNPS)

Based in California, SNPS provides software, intellectual property (IP) and services. The company offers products and services in the categories including core electronic design automation (EDA), IP, Systems and Software Integrity, Manufacturing Solutions, and Professional Services. The company supplies the EDA software that engineers use to design and test integrated circuits, also known as chips. It is also a provider of software tools that developers use to develop software code in a range of industries, including electronics, financial services, energy, and industrials.

SNPS  collaborated with Microsoft Corporation (MSFT) this month on its Rapid Assured Microelectronics Prototypes (RAMP) program to support the development of integrated circuit hardware and workflow prototypes that incorporate SNPS’ assured design and manufacturing flows into MSFT’s cloud computing arm Microsoft Azure. And last month, SNPS demonstrated silicon proof of DesignWare 112G Ethernet PHY IP in a 5nm FinFET process that delivers significant performance, power and area advantages.

SNPS also announced the availability of DesignWare Integrity and Data Encryption (IDE) Security Modules this month. It helps designers protect against data tampering and physical attacks in high-performance computing (HPC) systems using the PCI Express (PCIe) 5.0 architecture or Compute Express Link (CXL) 2.0 interface.

SNPS’ revenue has increased 16.3% year-over-year to $970.32 million for the fiscal 2021 first quarter, ended January 31, 2021. Its revenue from its  time-based products segment increased 13.5% year-over-year to $631.29 million, and its revenue from its maintenance and service segment increased 29.4% year-over-year. On a non -GAAP basis, the company’s net income was reported to be $239.47 million, up 52.8% year-over-year. Also, its non-GAAP EPS increased 50.5% year-over-year to $1.52.

A consensus EPS estimate of $1.54 for the current quarter, ending April 30, 2021, represents a 26.2% improvement year-over-year. Moreover, SNPS has surpassed the consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $992.26 million for the current quarter ending April 30, 2021 represents a 18.6% rise from the same period last year.

SNPS has gained 62.5% over the past year and closed Friday’s trading session at $268.07.

SNPS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

SNPS has a B grade for Growth, Sentiment, Quality and Momentum. We have also graded SNPS for Value and Stability. Click here to access all of SNPS’ ratings.

SNPS is ranked #2 among 52 stocks in the B-rated Technology – Hardware industry.

Cadence Design Systems, Inc. (CDNS)

Headquartered in San Jose, California CDNS markets  software, hardware, services, and reusable integrated circuit (IC) design blocks worldwide. The company's product categories include Functional Verification, Digital Integrated Circuits (IC) Design and Signoff, Custom IC Design and Verification, System Interconnect and Analysis, and Intellectual Property (IP). In addition, CDNS offers services related to methodology, education, and hosted design solution, as well as technical support and maintenance services.

CDNS entered an agreement on January 20to acquire NUMECA International, a leader in computational fluid dynamics (CFD), mesh generation, multi-physics simulation and optimization. NUMECA’s technologies are expected to support CDNS’ Intelligence System Design strategy and broaden its system analysis portfolio with CFD solutions. In December, Samsung Foundry certified CDNS’ complete Cadence system analysis and advanced packaging design tool flow as a Samsung Multi-Die Integration (MDI) advanced packaging reference flow.

CDNS is expected to announce its financial results for the fourth quarter and fiscal year 2020 ended December 31, 2020 on February 22. CDNS’ revenue for the third quarter ended September 26, 2020 was reported to be $666.61 million, up more than 15% year-over-year. The company’s revenue from its product and maintenance segment increased 15% year-over-year to $630.33 million. Its net income increased 59.2% year-over-year to $161.63 million, and its non-GAAP EPS increased 29.6% year-over-year to $0.70.

A  consensus EPS estimate of $0.71 for the quarter ending March 31, 2021 represents an 18.3% improvement year-over-year. Moreover, CDNS has surpassed the consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $703.11 million for the quarter ending March 31, 2021 represents a 13.8% rise year-over-year.

CDNS has gained 74.5% over the past year and closed Friday’s trading session at $139.66.

CDNS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.

The stock has a grade of A for Quality and B for Sentiment and Momentum. We have also graded CDNS for Value, Growth and Stability. Click here to access all of CDNS’ ratings.

CDNS is ranked #11 in the same industry.

Amdocs Limited (DOX)

DOX is a provider of software and services for communications, pay television (TV), entertainment and media industries and to other service providers. The company markets  a line of services designed for various stages of a service provider's lifecycle, including planning, delivery, implementation, and ongoing support and operations, such as end-to-end systems integration, managed, testing, cloud, digital business operations, and consulting services. DOX also provides fifth generation (5G) charging, policy and cloud-native technologies.

This month , C Spire, a privately held U.S. telecommunications and technology company, selected DOX’s Openet microservices-based Policy and Charging Controls to support its 5G plans. The company also announced a multi-year strategic partnership agreement on February 2 with T-Mobile to accelerate T-Mobile’s digital transformation and next generation hybrid-cloud operations to support T-Mobile’s post-merger integration activities and unlock its operational synergies. On the same date, Movistar Peru, a subsidiary of Spanish telecom giant Telefónica, signed a multi-year agreement with DOX.

DOX’s  revenue for the fiscal 2021 first quarter, ended December 31, 2020 increased 4.3% year-over-year to $1.09 billion. Its  total revenue includes record managed services revenue of $623.7 million, up 7.6% year-over-year. Its net income increased 158.5% year-over-year to $299.63 million and its non-GAAP EPS increased 9.4% year-over-year to $1.16.

A consensus EPS estimate of $1.138 for the quarter ending June 30, 2021 represents a 10.3% improvement year-over-year. Moreover, DOX has surpassed the consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $4.39 billion for the fiscal year 20212 represents a 3.4% rise from the same period last year.

DOX has gained 24.8% over the past nine months and closed Friday’s trading session at $76.97.

DOX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.

DOX has a B grade for Quality, Value, Momentum and Stability. We have also graded DOX for Growth and Sentiment. Click here to access all DOX’s ratings.

DOX is ranked #11 of 60 stocks in the Software – Business industry.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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SNPS shares were unchanged in after-hours trading Monday. Year-to-date, SNPS has declined -1.76%, versus a 3.52% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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