5 Software Companies To Accumulate

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The software industry offers a wide range of financials, with profitable companies performing well while unprofitable ones face valuation and share price declines.Opportunities for investors in the ...

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href=https://seekingalpha.com/article/4708403-five-software-companies-to-accumulate><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The software industry offers a wide range of financials, with profitable companies performing well while unprofitable ones face valuation and share price declines.Opportunities for investors in the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4708403-five-software-companies-to-accumulate\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"DASTY","symbol_name":"Dassault Systemes 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Equity A2 SGD-H","LU1804176565.USD":"EASTSPRING INV GLOBAL GROWTH EQUITY \"A\" (USD) ACC","LU0757428866.USD":"THREADNEEDLE (LUX) GLOBAL SMALLER COMPANIES \"AE\" (USD) ACC","BK4008":"航空公司"},"translate_title":"5家需要积累的软件公司","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ADSK":1,"WTCHF":1,"SPSC":1,"SGGEF":1,"ROP":1,"PTC":1,"OTEX":1,"NEMTF":1,"LTM":1,"HXGBF":1,"EMR":1,"DSGX":1,"ABBNY":1,"DASTY":1,"AZPN":1},"content_text":"The software industry offers a wide range of financials, with profitable companies performing well while unprofitable ones face valuation and share price declines.Opportunities for investors in the software industry include undervalued companies due to geopolitical risks, cyclicality, and unique financial profiles.Companies like Roper, Dassault Systèmes SE, Descartes, Aspen Tech, and Nemetschek offer unique opportunities for investors to accumulate shares over time for long-term growth.sankai/iStock via Getty Images Introduction Software has always been a difficult industry to invest in, unless you just buy and hold because companies have an extremely wide range of financials despite offering similar products. Some firms are truly profitable, but growing slowly. Others are some of the fastest growing companies in the market, but provide excessive risk to investors thanks to losses and high valuations. Overall, the market has performed well over the past year as growth-oriented firms remain healthy, as long as they are profitable. Those that fail to be profitable have seen their valuations and share prices plummet, and remain gambles on future success. Remember, slow and steady wins the race. Instead, despite profitable tech companies generally trading close to all-time highs, I still believe it is better for the majority of investors to invest in already proven technologies rather than speculative ones that are unable to drive profitability. I believe it is time for a market update because I see a few opportunities for investors to take advantage of unique pricing trends that can be found within the software industry. As I have discussed prior, many software companies have divergent price patterns. In this article, I will highlight a variety of opportunities, from unfair geopolitical risk undervaluation to a recent merger with an industrial giant. Each company has pros and cons, but remain my top choices in the sector for investors thanks to secular growth opportunities, a trading pattern that is not similar to big tech, and unique circumstances that make recurring investments year round a smart idea. Below, I have tabled the financial highlights of the five listed companies' financials, along with a few other profitable peers for comparison.   Company 10 Year Growth CAGR Leverage Ratio (Net Debt / EBITDA) P/S (LTM) EBITDA and Net Income Margin LTM (%)          Roper Technologies, Inc. (ROP) 7.3 2.8 9.6 (increasing with time) 41/22 (Improving)   Dassault Systèmes SE (OTCPK:DASTY) 11.5 Net Cash Positive 7.5x (almost the lowest since 2018) 23/19 (Cyclical)   The Descartes Systems Group Inc. (DSGX) 14 Net Cash Positive 14.8 41/21 (Improving)   Aspen Technology (AZPN) 6-9 0.2 11 33/-2.5 (Volatile)   Nemetschek SE (OTCPK:NEMTF) 16 Net Cash Positive 12.1 26/19 (Improving)   Constellation Software Inc (CSU:CA) 19.5 1.2 7.5 18/7 (Falling)   The Sage Group plc (OTCPK:SGGEF) 5.5 1.5 4.7 21/12 (Falling)   WiseTech Global Limited (OTCPK:WTCHF) 25-30 0.2 34 39/24 (Improving)   Open Text Corp (OTEX) 12.5 4.7 1.4 26/2.9 (Improving EBITDA, Volatile NI)   PTC Inc (PTC) 6.3 2.2 9.3 27/13 (Cyclical)   Click to enlarge Table 1: Compiled by author with Seeking Alpha, Koyfin, and company data. Roper Roper is one company who has defended the notion that growth cannot be maintained indefinitely. As a diversified conglomerate of various niche software platforms, Roper has established a stunning financial profile reflective more of a monopoly such as the tech giants. With the company maintaining total revenue growth between 5-8% long-term, investors are ascertained the company will grow faster than inflation and the broader market. But, the additional benefit of margin expansion over time, one of the best in the market, has allowed for earnings growth to average a few percentage points higher than total revenues. Combined with the necessary valuation increase to match the much improved financial profile, investors have been very happy over the past few decades. So now that I have established the fact that Roper has a top-tier software sector financial profile, the key for investors is whether the time is right to invest. While most will look at the severely increased valuation compared to just 10 years ago (less than 2.0x P/S compared to 8.9x currently) as a bearish indicator, valuation can easily be negated by steady accumulation of shares over time. And, with a high valuation comes frequent declines in share price with earnings that miss investor expectations. This has just happened as of the July 2024 report, and shares can now be picked up slightly cheaper than months prior. Also, Roper's historical price trend is less volatile than most tech companies in the mid-cap realm, so timing is less important overall. However, I can also point to a few indicators that make accumulation a better idea than making a lump sum at prices within 5-10% of all-time highs. First, while both EBITDA and Net Income margins have been increasing steadily year after year since the early 2000s, there has been some weakness at the NI level over the past year. As an indication of larger and riskier acquisition-led growth, every conglomerate must maintain their standards in optimizing and driving efficiency at their new subsidiaries. This risk is also reflected in the comparatively high leverage ratio of 2.6x Net Debt to LTM EBITDA that limits flexibility and prevents future growth potential. This is one reason why the valuation has failed to rise above 10x P/S, despite breaching those levels in 2021/22. As long as these negatives exist, investors may happily acquire shares at a temporarily depressed valuation and/or price over the coming months or quarters. And, investors in Constellation Software, the closest public peer, should really look at how Roper has outperformed while Constellation's poorer acquisitions have been detrimental to the fundamentals. I would consider selling CSU for Roper if you have the chance. Summary: After years of proven success, and a lack of price volatility, there is little reason to not accumulate shares over time. Seeking Alpha Dassault Systèmes SE While Roper is a great example of steady improvements in financials over time leading to stable share price increases over time, Dassault's opportunity is more risk-oriented in terms of cyclicality. As a market leader in project management, design, and simulation software, Dassault does offer significant profitability and growth, albeit slightly volatile in terms of overall earnings growth. Despite the volatility, 10 year revenue is at a 10.4% CAGR and diluted EPS is at a 14.4% as of the last earnings. Revenues are also rarely negative, as diverse end customer exposure provides safety. In particular, I view Dassault's performance as better and more diversified than key peer Autodesk (ADSK), and believe industry interested investors keep their exposure with Dassault, and another firm coming later in this list. Investors can currently take advantage of three key factors if they begin accumulating shares at current levels. First, this quality business is currently in a revenue down cycle, with quarterly growth below 5% for about a year. EBITDA generation has also suffered of late, although Net Income margins are at record highs. This, combined perhaps with unique declines in sentiment due to French political worries, allows investors to purchase shares at a cheap level (7.6x P/S compared to 9.9x mean over the past 5 years. The recent 6%+ jump in earnings in July 2024 is another indicator that shares are more likely undervalued, and are up to 25% off highs seen just six months ago. So, despite the fact that cyclicality limits the long-term opportunity of this company, the short-term opportunity seems worth considering. Summary: Temporary geopolitical risks due to French elections have led to a significant decline in price that is a stunning opportunity due to little risk of financial decline. Seeking Alpha Descartes Descartes is a unique company that highlights the long-term potential of a growth firm. After almost falling to bankruptcy in the early 2000s, Descartes turned themselves around and focused on profitable growth. This includes maintaining revenue growth above 14% annually over the past 10 years, and margins have increased impressively to today's' levels. Also, the company has negligible debt and plenty of cash, so the addition of leverage will easily allow for the creation of revenue growth when needed. There may also be the chance for reduced dilution, as shares outstanding have not increased significantly since 2020, and any buybacks would be greatly beneficial to total returns. If the current path continues, investors can look forward to continued 20% or more average EPS growth from current levels, thanks to the opportunity present in modernizing the logistics industry globally. There is still plenty of risk at a 14.6x P/S, but maintaining a long-term mindset and investing on a recurring basis may allow for better cost averages. Like Roper, Descartes has shown relatively low volatility to develop a timing pattern, so patience may not end up allowing for excess returns. While I, personally, own WiseTech Global, I believe investors adding to Descartes on a regular basis will be very happy in the years to come. And, for an even smaller peer performing just as well, long-term investors should also take a look at SPS Commerce (SPSC). Summary: Buy as early as possible before this company continues to soar higher and higher. Seeking Alpha Aspen Tech AspenTech is a provider of software for the chemicals, materials, and industrial process sectors. In my eyes, the firm is one of the best investments in true sustainability: making our non-renewable industries more efficient while they remain essential. Despite being the only company on this list facing frequent NI losses over the past few years, Aspen does offer investors unique price action more reflective of materials and energy sectors, their main customers. Therefore, after a strong 2023, the past few months have seen a flat trading pattern as commodities struggle with recessionary pressure. However, the underlying secular opportunity of digitization in industrial processes is immense and Aspen reflects this as high single digit revenue growth annually, above 30% EBITDA margins, and low leverage of 0.2x Net Debt to LTM EBITDA. Of the group of companies I have covered, Aspen offers one of the most unique situations for shareholder support: majority ownership by industrial conglomerate Emerson Electric (EMR). With EMR holding 55% of shares, formed through the merger of Emerson's software group with Aspen's industrial software, there is a chance for the rest of the shares to be acquired in time. If not, the new company is now far cheaper and profitable, so the synergies will allow for continued success. At 11.1x P/S, investors once again face a high valuation that may be risky, despite being well below the valuation of years prior. As a long-term investor, I believe that Aspen presents unique exposure that cannot be found on its own, as compared to investing in a conglomerate such as Emerson or ABB (OTCPK:ABBNY), and that may be worth the price down the road. Summary: No other company offers more sustainable exposure to our necessary industrial processes, and the levers are available for significant investor returns as the net income losses turn into steadily improving EPS growth. Aspen Technology Presentation Nemetschek While Dassault Systèmes is offering a low valuation opportunity in the design software industry, but has struggled to drive linear earnings improvement over time, some investors may find German architecture and construction software developer Nemetschek to be a better long-term opportunity to steadily accumulate. Also, revenue growth is up to 5% faster per annum than Dassault, and at a fifth of the market cap, so those thinking long-term can stomach a higher valuation when considering the risks. Perhaps both firms are viable investments, as these firms offer far more growth opportunities than industry stalwart Autodesk. This also ties in nicely with recent business strategy news of the last quarter, with agreements between Autodesk and digitalization technology leader Hexagon (OTCPK:HXGBF) that will only further entrench Nemetschek as a major industry participant. There are two financial indicators where Nemetschek really stands out against stiff competition: far better margin improvements (reduced cyclicality) over time and a huge cash pile available to invest in future growth. While Autodesk is slightly leveraged (0.3x ND/EBITDA) and Dassault has 1 Billion EUR in cash available over debt, Nemetschek's 270 million EUR in excess cash is far more useful when adjusted for market cap (37x net cash to market cap vs 49.5x for Dassault). All-in-all, most investors will be quite happy owning shares of both firms in the future, but I, personally, favor Nemetschek as I have a very long-term outlook. Summary: I always recommend looking abroad to find industry leaders, and Nemetschek has all the pieces in place to continue outperforming peers. Nemetschek Investor Presentation  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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