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3 Top Ranked Software Stocks to Buy Now: DDOG, APP, MNDY

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In the years leading up to the COVID-19 pandemic and the two years that followed, software stocks were a bright spot for the market. High-growth businesses with wide margins and strong stock price appreciation offered everything an investor could ask for.

However, valuations became excessively inflated, and companies projected to be highly cash-flow positive were still burning cash to fuel growth. In 2022, reality set in, and higher interest rates sent software stocks tumbling. Even after recovering from their 2022 lows, they have generally underperformed the broader market.

Below we can see that the iShares Software ETF ((IGV - Free Report) ) has yet to break above its 2022 high, while other major indexes have been pushing record highs all year. But the tides seem to have turned, as IGV just staged a major technical breakout, and now boasts a Zacks Rank #1 (Strong Buy) rating.

Moreover, a number of software-oriented stocks are receiving earnings estimates upgrades and are showing robust momentum. Datadog ((DDOG - Free Report) ), AppLovin ((APP - Free Report) ) and Monday.com ((MNDY - Free Report) ) are three stocks that show tremendous potential going forward.

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AppLovin: High Growth, Industry Tailwinds and Fair Valuation

AppLovin is a mobile technology company that acts as a hub for app developers. It provides a variety of tools to assist developers in growing their apps and businesses. This includes helping developers make money through in-app advertising, offering marketing and user acquisition solutions to find new users, and supplying analytics tools to track app performance.

Essentially, AppLovin equips developers with everything they need to succeed in the competitive mobile app market.

AppLovin has everything I look for in a stock. The business model is rock solid, being asset-light with high margins. Additionally, the business has huge long-term tailwinds as online ad sales are growing every year, positioning it perfectly industry-wise. The digital advertising market is forecast to grow at a CAGR of 15.5% through 2030.

The company not only has high sales and earnings forecasts, with EPS projected to grow 20% annually over the next three to five years, but it also boasts a very reasonable valuation. Moreover, it has held a Zacks Rank #1 (Strong Buy) rating for much of the last 18 months and has tremendous momentum behind it.

Finally, AppLovin has been conducting share buybacks, reducing shares outstanding by more than 10% in the last three years.

The technical setup stands out to me as well. APP stock had been building out this bull flag over the last two months and broke out just last week. If the share price holds above the $82.50 level, it should make another new high soon.

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Image Source: TradingView

 

Datadog: Technical Breakout Hints at Big Move Ahead

Datadog acts as a central nervous system for companies’ entire technology stack. It monitors the performance and health of applications, servers, databases, and security measures – all rolled into one cloud-based platform.

This means developers can track application performance and identify bugs, IT operations can ensure servers are running smoothly, and business users can gain insights into overall system health. Datadog offers features like real-time dashboards for easy visualization of key metrics, log management for troubleshooting, and security monitoring to detect and respond to potential threats.

DataDog is a high-growth company, with analysts expecting annual sales to climb 22% this year and 21.5% next year. Despite operating in a crowded data analytics space, DDOG boasts impressive customer retention. Year-over-year revenue growth per existing customer has hit 110% in both 2022 and 2023, a testament to the success of their "land and expand" strategy that focuses on cross-selling new products to existing clients.

The company also enjoys a Zacks Rank #1 (Strong Buy) rating, reflecting upward trending earnings revisions.

Finally, DDOG price action has exhibited some bullish activity in the last week. The stock had been forming a large bull flag in the first six months of the year (weekly chart below), and just broke higher last week. As long as the stock holds above the $128 level, it should go on a bull run.

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Image Source: TradingView

 

Monday.com: Powerful Earnings Revision Trend

Monday.com is a cloud-based work management platform designed to help teams organize, manage, and collaborate on projects. It functions as a visual workspace where users can create customizable boards with tasks, deadlines, and progress tracking.

It is a flexible tool and utilizes software integrations, custom dashboards and other collaboration tools to improve company productivity.

MNDY is experiencing explosive growth, with sales expected to jump 30% this year and continue its upward trajectory with a projected 27% increase next year. This momentum extends to earnings, with analysts forecasting a whopping 41.6% annual growth in EPS (earnings per share) over the next 3-5 years.

Monday.com also boasts a Zacks Rank #1 (Strong Buy) rating, reflecting the significant upward revisions to their earnings potential.

Recent analyst revisions show a 26% increase in estimated earnings for the current quarter and a 19% bump for the entire fiscal year 2024. These revisions highlight growing confidence in the company's ability to deliver exceptional results.

Zacks Investment Research
Image Source: Zacks Investment Research

 

Software Stocks Offers Huge Potential

Several tailwinds suggest continued growth potential for software stocks. Many of these companies are expecting high growth rates in the coming years, with the companies shared here expecting sales to jump between 22% and 31%.

A potential reduction in interest rates by the Federal Reserve could further bolster this sector. Lower interest rates can stimulate economic activity and potentially lead to higher valuations through multiple expansion in these stocks.

It's important to note that sentiment towards software stocks remains relatively low after a period of underperformance. Additionally, concerns regarding the potential impact of artificial intelligence (AI) on software companies have caused some investor apprehension. While the long-term influence of AI on the software landscape deserves consideration, its immediate threat of rendering all software obsolete seems unlikely.

Taking these various factors into account, Datadog, AppLovin, and Monday.com all present compelling investment opportunities due to the potential catalysts discussed above.

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