2 Software stocks to Buy, 2 to Sell

The software industry has been in the limelight since the onset of the COVID-19 pandemic, owing to its critical role in navigating the remote and hybrid working lifestyle. Many companies have used this opportunity to expand their products and services. 

As the hybrid working lifestyle is expected to continue in the near term, with rising concerns surrounding the omicron coronavirus variant, fundamentally sound software stocks Oracle Corporation (ORCL) and VMware, Inc. (VMW) could be solid bets now.

However, the ongoing chip shortage and increased cyberattacks have caused the weak players in the software industry to witness a sharp pullback. As the markets continue to reverse with major benchmark indexes slumping, fundamentally weak software stocks OKTA, Inc. (OKTA) and ZoomInfo Technologies Inc. (ZI) are best avoided now.

Stocks to Buy:

Oracle Corporation (ORCL)

ORCL provides software to enterprises for information management. Oracle software runs on an extensive list of techs such as network computers, digital assistants, set-top devices, PCs, to name a few. It also offers database and rational servers, decision support tools, and business applications. 

On November 18, ORCL announced a strategic alliance with SoundHound Inc, a global leader in voice Artificial Intelligence (AI), where Oracle Cloud Infrastructure (OCI) will provide the former with core cloud requirements. OCI has processed more than 1 billion annual queries that accelerated both companies' growth. 

ORCL has also made strides in foreign developments as it leveraged Bharti Airtel’s data center network, Nxtra, to expand its presence in India. This collaboration has set ORCL’s cloud solutions to reach over 900 million customers by 2025. 

Samsung Securities, Korea’s leading financial investment company’s decision to move its analytics business to the cloud using OCI, has profited OCRL and paved a path to providing its services to the financial sector. 

For its fiscal first quarter ended August 31, ORCL revenues increased 3.9% year-over-year to $9.73 billion. Non-GAAP operating income rose 3.8% from the prior-year quarter to $4.33 billion. The company’s non-GAAP net income and non-GAAP EPS came in at $2.94 billion and $1.03, respectively, up 2.2% and 10.8% from the same period last year.

The consensus EPS estimate of $1.11 for the fiscal second quarter (ended November 2021) represents a 5% increase from the last quarter. The consensus revenue estimate of $10.21 billion for the about-to-be-reported quarter reflects a 4.2% increase from the same period last year. Also, the company beat Street EPS estimates in each of the trailing four quarters, which is impressive. The stock has gained 12.1% over the past six months.

ORCL’s 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.

ORCL has a Value, Stability, Sentiment, and Quality grade of B. In the 169-stock Software – Application industry, it is ranked #5. Click here to see the additional POWR Ratings for ORCL (Growth and Momentum).

VMware, Inc. (VMW)

VMW offers an array of digital products and solutions that supports app modernization, cloud storage services, digital workspaces, and others that enable organizations to deliver the best customer service. 

VMW has gained operational and financial flexibility from its recent spin-off from Dell Technologies Inc. (DELL), which has positioned the company to lead in multi-cloud services for all apps and digital innovation. 

VMW’s business model is based on strategic acquisitions, which is reflected in their string of acquisitions, including a recent addition of Mesh7 in 2021. This is one of the most profitable acquisitions as it assisted VMW to improve application resiliency, one of their core services. 

On November 24, 2021, VMW partnered with Mitacs, a non-profit national research organization, and launched its Digital Equity Grid Innovation initiative, also known as TETRA. The initiative aims to advance applied research that will play a critical role in paving a sustainable path for 6G.

For the fiscal third quarter ended October 29, 2021, VMW’s total revenues increased 11.3% year-over-year to $3.19 billion. Adjusted operating income rose 5.3% from the prior-year quarter to $935 million. Its non-GAAP net income and non-GAAP EPS from continuing operations came in at $725 million and $1.72, up 3% and 3.6%, respectively, from the same period last year.

The consensus EPS estimate of $7.28 for the next year (2023) indicates a 1.1% year-over-year increase. Likewise, the current quarter's consensus revenue estimate of $3.52 billion reflects a year-over-year improvement of 7%. However, the stock has lost 26.5% over the past six months.

VMW’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.

VMW has a Value, Sentiment, and Quality grade of B. In the 59-stock industry of Software - Business, it is ranked #5. Click here to see the additional POWR Ratings for VMW (Growth, Stability, and Momentum).

Stocks to Avoid:

OKTA, Inc. (OKTA)

OKTA provides identity management platforms. They provide these services to enterprises, universities, governments etc., in the United States and internationally. OKTA’s core offering is Okta Identity Cloud that offers a suite of products that helps in securing identities and databases. 

OKTA introduced a standalone offering, Okta workflow, for all customers on October 13. Okta Workflows automates complex identity-centric business processes for many of the world’s leading brands. This has helped most organizations work seamlessly. It's OKTA’s first standalone product.

For the third fiscal quarter ended October 31, OKTA’s non-GAAP operating loss came in at $9.52 million, compared to an operating income of $5.51 million in the prior-year period. The company’s non-GAAP net loss came in at $10.58 million versus a $5.75 million net income in the year-ago period. Its non-GAAP loss per share came in at $0.07, compared to an EPS of $0.04 in the prior-year period.

The consensus revenue estimate of $358.75 million for the current quarter (ending January 2022) indicates a year-over-year increase of 52.8%. However, OKTA’s consensus EPS estimate of a negative $0.26 for the current quarter indicates a 533.3% decrease from the previous quarter. The stock has decreased 12.8% over the past month.

OKTA’s weak prospects are reflected in its POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. The stock has a Value and Stability grade of D. It is ranked #49 in the Software-Business industry.

Click here to see additional POWR Ratings for OKTA (Growth, Momentum, Sentiment, and Quality).

ZoomInfo Technologies Inc. (ZI)

ZI is a SaaS company whose cloud-based platform offers end-to-end marketing and sales tools to its users, helping them through sales. Its core product is video-conferencing, whose popularity soared due to the COVID-19 pandemic. 

On September 9, ZI acquired Ringlead, one of the top companies in data orchestration and revenue operations automation. This acquisition seamlessly bridges the ZoomInfo platform's intelligence and engagement layers, empowering customers to streamline their data across systems and revenue teams. 

For the fiscal third quarter 2021 ended September 30, cash and cash equivalents for the year came in at $196.80 million, declining 54.9% year-over-year. The stock has declined 10.3% over the past month.

This bleak outlook is reflected in ZI’s POWR Ratings. The stock has an overall D grade, equating to Sell in our proprietary rating system. ZI has a Value and Stability grade of D. It is ranked #120 in the Software-Application industry.

In addition to the POWR Rating grades we’ve stated above, one can see ZI’s ratings for Growth, Momentum, and Quality here.

ORCL shares were trading at $87.88 per share on Friday afternoon, down $2.11 (-2.34%). Year-to-date, ORCL has gained 37.94%, versus a 21.35% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

More...