3 best software stocks to buy for the long haul


Our daily life revolves around software. Whether at home, at work or at play, software can play a vital role in our business. Due to annual recurring revenue (ARR), profitability, and high product demand, software companies are making tremendous investments. These three companies should be the foundation of any well-diversified portfolio.

1. Microsoft

It’s hard to talk about software stocks without mentioning the world’s largest software company, Microsoft (NASDAQ: MSFT). Microsoft dominates among most of the others, with a market cap of over $ 2.5 trillion and FY2021 revenue of over $ 168 billion. The company’s metrics are also top notch.

Image source: Getty Images.

Microsoft has experienced consistent revenue growth for many years. Since fiscal 2019, revenues have grown from $ 125.8 billion to $ 168.1 billion in fiscal 2021. This represents a compound annual growth rate of over 15%. This may not seem very high compared to some growing companies. However, when you consider the huge size of the company, 15% is truly impressive.

Each of Microsoft’s three segments increased revenue and operating profit, with cloud revenue being particularly impressive at $ 60.1 billion in fiscal 2021. Margins are also on the rise, as the margin increases. Operating reaching almost 42% in FY 2021. Net margin also reaches an astounding 38% as shown below.

MSFT operating margin (annual) graph

MSFT operating margin data (annual) by YCharts

Microsoft is not resting on its laurels. Instead, the company is working on developing software for the Metaverse. Microsoft wants to conquer the business metaverse market with its Mesh and Teams software. These will allow users to interact in this virtual 3D interface. If Microsoft’s success in the cloud is any indication, the company will be very successful in the metaverse as well.

2. Synopsis

The demand for semiconductors, or “chips”, is currently much greater than the supply. Just ask a car manufacturer or dealership. In 2021, several manufacturers had to strategically halt production due to the chip shortage. This excess demand creates an excellent market for Synopsis(NASDAQ: SNPS) Software. Synopsys does not produce the chips – Synopsys sells software that engineers use to design and test them.

Due to excess demand, Synopsys accelerated its revenue growth in fiscal 2021. The company increased revenue by 14% in fiscal 2021 after increasing 10% during in FY2020 and 8% in FY19. This pushed revenue to over $ 4.2 billion. , as shown below.

Synopsys Revenue Graph 2019, 2020, 2021

Data source: Synopsys. Chart by author.

This growth is reflected in net income, where diluted earnings per share rose from $ 4.27 in fiscal 2020 to $ 4.81 in fiscal 2021, a rate of over 12%. . The company is currently trading at a price-to-sell ratio of just over 11, and the stock is near an all-time high. However, this should not deter investors. Wall Street is bullish on the stock and the short-term interest rate is below 1%, indicating that investors do not view it as overvalued.

3. Amazon

Many people may not think of Amazon (NASDAQ: AMZN) as a software publisher, but it is. In fact, Amazon derives more operating revenue from its cloud computing segment, AWS, than from its e-commerce business. In the first nine months of 2021, AWS produced just 13% of Amazon’s total revenue, but over 60% of its operating profit. AWS net sales were $ 44.4 billion, up 36% from the same nine-month period in 2020. In the third quarter of 2021 alone, AWS net sales increased by 39% compared to the same period in 2020, which shows that growth is accelerating in this segment.

Amazon’s e-commerce business is currently experiencing headwinds. In 2021 and through 2022, supply chain bottlenecks added significant costs to the bottom line. The tight labor market also added additional expenses. For this reason, the North America and International segments recorded a combined loss in the third quarter of 2021. As a result, the stock was unusually stable over the 2021 calendar.

AMZN chart

AMZN data by YCharts

The good news is twofold. First, these headwinds are only temporary and are expected to ease over the course of 2022. Second, AWS took over, and overall operating income for the first nine months of 2021 was still significantly up from the previous year. same period in 2020. E-commerce activity also recorded significant growth. in net sales, well in excess of 2020 figures. Once the headwinds ease, Amazon will once again be operating at full capacity with a significant increase likely for long-term shareholders.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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