This month, volatility has started to creep into the stock market. On the surface, Nasdaq’s uptrend will hide the sector rotation underway. Mega-cap stocks like Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) soften the decline in the other stocks listed in the index. Hyper-growth software stocks are among the under-performing investments that readers may not have noticed. Some of them are down by 50% on the year. Whenever a high-flying technology stock is down by that much, investors should intensify their research in those out of favor stocks.
Reasons why stocks fall sharply include positive buying momentum fading, lock-up expiring after an initial public offering (IPO) or unfavorable valuations. When picking from among the software stocks on a discount, favor the companies with sustainable business growth.
Here are seven software stocks that investors should consider:
- C3.ai (NYSE:AI)
- Digital Turbine (NASDAQ:APPS)
- CrowdStrike Holdings (NASDAQ:CRWD)
- Okta (NASDAQ:OKTA)
- SentinelOne (NYSE:S)
- Sea (NYSE:SE)
- Unity Software (NYSE:U)
Scores in green are strong, while those in red are weak.
In these scores, Digital Turbine stands out for its strong quality and growth score. The valuation ratings are low for the seven picks, especially with SentinelOne and Sea. Those firms will need to post accelerating revenue and expanding margins in future quarters. Market sentiment could turn negative, hurting their stock price further. Still, bulls may re-enter the software stocks, betting that they will resume their uptrend in the new year.
Discounted Software Stocks: C3.ai (AI)
C3.ai has lost all of its initial growth after its IPO last year and is 35% down from its original $42 price. Investors piled on the stock after its IPO. The small revenue figures translate to the stock trading at almost 17 times sales.
On Dec. 9, C3.ai won a decisive $500 million contract with the Department of Defense. The five-year agreement will let the DOD buy C3.ai’s Enterprise AI products. Thomas M. Siebel, the Chief Executive Officer of C3.ai, said the DOD may accelerate “research projects in simulation and modeling and production deployments for operations and sustainment.”
Short-sellers have an 18.5% short float against the company. After a sustained downtrend throughout 2021, AI stock could form a longer-lasting uptrend. This would set a squeeze. Government contracts differ from other deals. Governments usually install software products in small phases. After an agency is satisfied with the return on investment, it will increase its contract size.
C3.ai’s light revenue of $58.3 million is a potential inflection point. The company raised its revenue guidance for the fiscal year 2022. It expects revenue to grow by 35% – 37%, up from 17% growth in FY 2021.
Digital Turbine (APPS)
Digital Turbine’s downtrend began on Nov. 2 after the company posted quarterly results. The strong revenue guidance failed to impress investors.
In Q2 2022, Digital Turbine posted revenue more than quadrupling to $310.2 million year-over-year. On-device media is the fastest-growing segment, up by 73% YoY to $129.4 million. The market is overlooking the growth in APPS stock and low valuation. Still, it has a modest debt over equity ratio of 0.53 times. The forward price-to-earnings ratio is around 25 times.
In the quarter, the company announced Verizon (NYSE:VZ) and AT&T (NYSE:T) content wins. It also has a strong relationship with T-Mobile (NASDAQ:TMUS). Digital Turbine is in the early phases of expanding its content media growth with the three firms. As media products grow, the revenue per device will continue its growth rate. In Q2, revenue per device increased by more than 50% YoY on devices in the U.S. It grew by more than 100% outside of the U.S.
Tougher privacy restrictions on iOS devices may hurt near-term results. Still, the company will see a return on ad spending as it scales SingleTap on other distribution channels.
Discounted Software Stocks: CrowdStrike Holdings (CRWD)
Cybersecurity software firm CrowdStrike has been falling since Nov. 9 but has been relatively stable since posting Q3 results on Dec. 1. It reported revenue growing by 63% YoY to $380.1 million. The GAAP earnings per share loss of 22 cents likely scared investors. Still, CrowdStrike expects Q4 2022 revenue of up to $412.3 million. Non-GAAP EPS will exceed consensus estimates at 19 to 21 cents.
CrowdStrike is better than many software-as-a-service stocks. The product is good at detecting cybersecurity threats to organizations. When cyber attackers could put an organization out of business, they need CrowdStrike.
CrowdStrike’s 21 modules are not only in security software. It also supports intelligence and recently acquired Humio. Its competitors have no more than three. So, with real-time modules giving CRWD stock revenue growth, investors should not ignore this company.
CrowdStrike’s hyper-growth modules will give customers more efficacy and a total cost of ownership. The sales team has trial-to-pay and in-app trials to win customers. The lag between the trial period and conversion to paying customers will delay its growth. But as more customers sign up, investors will buy the stock for its strong growth prospects.
Okta (OKTA)
Okta is trading in a range as investors assess its growth prospects. In the third quarter, earnings missed estimates.
Okta, an identity authentication provider, posted revenue growing by 61% YoY. Subscription revenue grew by 63% YoY. Its remaining performance obligations grew by 49% YoY to $2.35 billion. Okta has growth catalysts ahead. For example, Okta earned an authorized vendor list designation for the first time on StateRAMP. This will give government and procurement officials the confidence it needs to buy SaaS solutions.
In the last quarter, it added over 700 new customers. Okta has the chance to upsell products to them. For example, Auth0 customers are becoming Okta workforce customers too. As this trend continues, expect the company to post strong Q4 2022 results and accelerated growth in its FY 2023.
Okta Workflow is a promising Workflow platform service. The product is powerful and easy to develop. Users may write any program and automate any process visually. The visual flow removes the need for programmers to develop workflows.
Discounted Software Stocks: SentinelOne (S)
SentinelOne is a cybersecurity firm. In the third quarter, it posted revenue growing by 128% YoY to $56 million. The GAAP EPS loss of 26 cents sent investors selling the stock after the report. Yet offering higher value packages will lift sales.
CEO Tomer Weingarten said its customers are opting for the complete platform solution. Adoption of its cloud modules will help the company expand its margins. In the fourth quarter, buying trends in the security industry are favorable. In addition, SentinelOne is expanding the distribution of incident response solutions. Within two quarters, investors should expect the company to beat its internal sales targets.
To grow sales, SentinelOne’s sales force is working closely with customer accounts. It is helping them get favorable prices. This will lead to better deal closing rates. Just as customers need CrowdStrike, they need SentinelOne for their cyber security needs.
Customers are recognizing SentinelOne’s technological advantages and unique capabilities. The firm does not compete with its incident response partners or its managed service providers. Mutual collaboration means the company and its partners serve their customer needs fully.
Sea (SE)
Sea tried and failed to break out above $350 last month, spending only a few days above the threshold. The stock tumbled again after posting quarterly results.
In Q3, Sea posted revenue growing by 122% YoY to $2.7 billion. GAAP EPS was a loss of 84 cents. The loss may have scared investors who prefer holding profitable software stocks. Sea’s e-commerce platform suits customers globally. For example, Sea is working with the Malaysian government to digitize rural sellers. It accelerated adoption by offering free e-commerce training to Malaysia’s local entrepreneurs. In Thailand, Sea is promoting the development of digital entrepreneurial skills for young entrepreneurs.
Sea’s partnerships with game studios have paid off. Expect esports tournaments to drive user engagement in its community.
In e-commerce, Shopee enjoyed revenue growing by 134% YoY to $1.5 billion. For the full year of 2021, Sea’s GAAP revenue will grow by over 135%, in the range of $5 billion and $5.2 billion.
Sea reported an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss because it is investing in opportunities. This will grow its ecosystems and serve its users better. Long-term investors will benefit by holding SE stock amid the short-term volatility.
Discounted Software Stocks: Unity Software (U)
Unity is a game development engine with stock that is underperforming. On Nov. 17, the firm sold $1.5 billion worth of convertible notes due in 2026. This is a perfectly timed sale because the stock peaked at $210.
Unity posted revenue growing by 43% YoY to $286.3 million. It announced it would acquire Weta Digital. CEO John Riccitiello said it needs Weta “as we aim to bring their dozens of tools and assets to creators around the world.” Weta is a leader in video effects development. For example, the company developed the visual effects for the Lord of the Rings film franchise.
With Weta, creators and digital artists now have the tools to build richer, more interactive content. This increases the value of the platform. Expect more game development and more hit game title releases.
Weta will expand Unity’s total addressable market by around $10 billion. It will attract talented artists and game developers to the platform. Should technology platforms evolve towards the metaverse, Unity will benefit the most.
On Wall Street, the average price target is $178.86.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
