Popular cloud-based software company Salesforce.com, Inc. (CRM) has seen solid demand for its solutions during the COVID-19 pandemic, due to widespread and ongoing digital transformation by businesses. However, the company’s acquisition of Slack Technologies, Inc. (WORK), which was announced on December 1, 2020, has lately led to trouble for the stock. This is because WeissLaw LLP is currently investigating an alleged breach in fiduciary duties and other violations by WORK’s board of directors in connection with the acquisition. Furthermore, CRM is relatively overvalued compared to its industry peers, as is evidenced by its 64.50 non-GAAP forward P/E multiple, which is 137.7% higher than the 27.13 industry average. Thus, we think the current investigations coupled with its overvaluation make CRM best avoided now.
However, the software industry is poised to grow substantially in the near term, bolstered by the rising adoption of hybrid work structures and the ongoing digital transformation. The global Enterprise Software Market is expected to grow at 4.1% CAGR to hit $46.72 billion by 2025. Given this backdrop, we believe it is wise to invest in fundamentally-sound software stocks Oracle Corporation (ORCL), SAP SE (SAP), and Workday, Inc. (WDAY). They have the potential to outperform CRM in the near term.
Click here to check out our Software Industry Report for 2021
Oracle Corporation (ORCL)
ORCL provides products and services that address all aspects of corporate information technology (IT) environments, including application, platform and infrastructure worldwide. The company operates through four segments—cloud services and license support; cloud license and on-premises license; hardware; and services. ORCL markets and sells its solutions directly to businesses in various industries, government agencies, and educational institutions, as well as through indirect channels.
In an announcement dated June 30, Medallia, Inc., a customer and employee experience management company, selected ORCL’s Oracle Cloud Infrastructure (OCI) to power its Medallia Experience Cloud SaaS platform as part of its multi-cloud strategy. OCI will address Medallia’s challenges in increasing data center costs, additional data residency requirements for international expansion, and a need for standard platforms for new services deployment. ORCL and Medallia will jointly market solutions that will accelerate Medallia’s global expansion and provide manageability and security at scale.
Also in June, ORCL attained FedRAMP High Provisional Authority to Operate (P-ATO) and an Impact Level 5 (IL5) accreditation for IaaS and PaaS, to boost the efficiency of cloud services for government customers to leverage. ORCL’s Oracle Digital Assistant and Oracle Cloud VMware Solution will deliver FedRAMP high security, predictable costs, and a single source for technical support, along with clear authority over systems control.
ORCL’s non-GAAP total revenues for its fiscal first quarter, ended May 31, 2021, increased 7.5% year-over-year to $11.23 billion. The company’s non-GAAP operating income came in at $5.45 billion, up 6% from the prior-year period. While its non-GAAP net income increased 19.7% year-over-year to $4.52 billion, its non-GAAP EPS increased 28.3% year-over-year to $1.54.
A $0.97 consensus EPS estimate for the current quarter, ending August 31, 2021, represents a 4% improvement year-over-year. ORCL surpassed consensus EPS estimates in each of the trailing four quarters. The $9.77 billion consensus revenue estimate for the current quarter represents a 4.3% gain from the prior-year period. Analysts expect the stock’s EPS to grow at a 10.6% rate per annum over the next five years. The stock has gained 26.5% over the past six months and closed Friday’s trading session at $81.82.
ORCL's POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Value and Quality. Click here to see the additional ratings for ORCL (Growth, Stability, Sentiment, and Momentum). ORCL is ranked #10 of 131 stocks in the Software - Application industry.
SAP SE (SAP)
Based in Germany, SAP operates as an enterprise application software company worldwide. The company offers e-business and enterprise management software, consults on organizational usage of its applications software, and provides training services.
On June 29, SAP released three new services for exploration, process optimization and innovation, and re-platforming and extension development to help customers access the full potential of the cloud using SAP Business Technology Platform (SAP BTP). These services provide greater scalability to address ever-growing business needs and enable customers to implement a hybrid cloud environment, allowing them to respond rapidly to changing market conditions. SAP expects to witness expanded market reach in the near-term.
At its global SAPPHIRE NOW conference, held on June 2, SAP unveiled the first step toward creating the world’s largest business network with SAP Business Network that will help companies modernize and digitalize their business processes to improve business outcomes. Bringing together Ariba Network, SAP Logistics Business Network, and SAP Asset Intelligence Network, this network enables customers to benefit from a new portfolio of sustainability-specific business applications that deliver exceptional transparency and measurement capability across the supply chain. SAP is expected to secure expanded access across various organizations.
For its fiscal first quarter, ended March 31, 2021, SAP's revenue from its cloud revenue segment increased 6.7% year-over-year to €2.15 billion ($2.54 billion). The company’s non-IFRS operating profit came in at €1.74 billion ($2.06 billion), up 17.5% from the prior-year period. Its non-IFRS net profit has been reported at €1.72 billion ($2.04 billion), which represents a 69.7% year-over-year improvement. SAP’s non-IFRS EPS increased 64.7% year-over-year to €1.40.
SAP surpassed the Street’s EPS estimates in each of the trailing four quarters. The revenue is estimated to be $7.97 billion for the current quarter, representing a 2.8% rise year-over-year. ANTM's EPS is expected to grow at an 8.1% rate per annum over the next five years. The stock has gained 12.7% over the past six months and ended Friday’s trading session at $141.72.
It’s no surprise that SAP has an overall A rating, which equates to Strong Buy in our POWR Ratings system.
The stock has an A grade for Sentiment, and a B grade for Stability, Value, and Quality. Click here to see the additional ratings for SAP (Growth and Momentum). SAP is ranked #3 in the Software - Application industry.
Workday, Inc. (WDAY)
WDAY develops enterprise cloud applications that help customers manage critical business functions and optimize their financial and human resources. The company offers human capital, spend, and financial management, as well as payroll, initiatives and higher education solutions for the finance, healthcare, manufacturing, education, and technology industries worldwide.
Last month, WDAY announced its plans to deliver Workday Payroll for Australia and for Germany. The move will leverage the company’s core payroll foundation in the cloud to provide human capital management (HCM), time, absence, and a payroll solution in a single system. This enables businesses to make their payroll processes more efficient and accurate, and better support their compliance with regulatory laws and standard business practices in these markets.
On March 09, WDAY completed its acquisition of Peakon ApS, an employee success platform that converts feedback into actionable insights. This acquisition enables organizations access to real-time visibility into employee experience, sentiment, and productivity, to help drive engagement and improve organizational performance. Both developments are likely to generate rising demand from enterprises from these markets in the near-term.
WDAY’s revenues for its fiscal first quarter, ended April 30, 2021, increased 15.4% year-over-year to $1.18 billion. The company’s non-GAAP operating income came in at $288.51 million, up 121.1% from the prior-year period. WDAY’s non-GAAP net income has been reported at $226.36 million for the quarter, which represents a 108.1% rise from the prior-year period. Its non-GAAP EPS increased 97.7% year-over-year to $0.87.
WDAY surpassed the Street’s EPS estimates in three of the trailing four quarters. For the current quarter, ending July 31, 2021, analysts expect WDAY’s revenue to be $1.24 billion, representing a 16.8% rise from the prior-year period. The stock’s EPS is expected to grow at a 16.3% rate per annum over the next five years. WDAY has gained 5.1% over the past nine months to close Friday’s trading session at $238.30.
WDAY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
WDAY has an A grade for Growth, and a B grade for Sentiment. We have also graded WDAY for Value, Stability, Quality, and Momentum. Click here to access all WDAY’s ratings. WDAY is ranked #26 in the same industry.
Click here to check out our Software Industry Report for 2021
ORCL shares were unchanged in after-hours trading Tuesday. Year-to-date, ORCL has gained 29.48%, versus a 16.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
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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