Jhe software market has long been an attractive hunting ground for potential investment. Well-known software companies like Microsoft and Adobe have provided shareholders with fantastic returns due to their large profit margins and ability to generate billions of dollars in annual cash flow. It also doesn’t hurt that the software industry has grown over the past few decades, providing a constant tailwind for these companies. This trend is expected to continue through 2030, with analysts expecting industry revenues to grow at a double digit rate through the end of this decade.
How can investors take advantage of this long-term growth? Here are two quality software stocks to buy for the long haul.
1. Drop box
drop box (NASDAQ: DBX) is a well-known file sharing, collaboration and workflow platform. The company was established a little over ten years ago and after its IPO in 2018, it has grown into a very profitable business. software company.
The company now offers a full suite of products to support its cloud storage/sharing business, including digital signatures, document scans, security features and remote work tools. The constant improvement of its product suite has resulted in a steady growth in the number of paying subscribers. In the first quarter, paid users of Dropbox totaled 17.1 million, compared to 9.3 million in the same quarter of 2017. Along with the growth in the number of subscribers, the average revenue per subscriber increased slightly, reaching 134.63 dollars last quarter, up from $110.79 five years ago.
This scaling of the business has brought fantastic operating leverage to Dropbox, and the business is now generating strong cash flow. Over the past three years, 12-month free cash flow has grown over 100% to $723 million. At the same time, its stock price is practically unchanged. With a market capitalization of $8.7 billion, the shares trade at a price to free cash flow (P/FCF) ratio of 12, which is well below the market average. Management is trying to take advantage of this discounted valuation by buying back shares. Over the past three years, Dropbox’s outstanding shares have fallen 9%, which will help boost earnings per share over the long term.
If paid subscribers and average revenue per paid subscriber continue to rise, Dropbox stock can do well in your portfolio when purchased at current prices.
you could put Autodesk (NASDAQ:ADSK) in the same class as Microsoft and Adobe – it’s one of the best software stocks of all time. Shares have risen more than 50,000% since the company went public in the 1980s, significantly outperforming the S&P500 over this period of time.
The first growth came from AutoCAD, Autodesk’s initial product released in 1982. The product is a computer-aided design (CAD) tool that is still one of the go-to services for the architecture, design and engineering industries. engineering and construction (AEC) to date. . Last year, the division generated $1.25 billion in revenue.
But Autodesk today is much more than AutoCAD. It owns Revit, the leading 3D design software for the architectural industry which is rapidly gaining popularity around the world. It follows Building Information Modeling (BIM) standards, which are also increasingly being adopted around the world. However, BIM has less than 50% market share in the majority of countries, meaning this secular growth is far from over. Continued adoption of BIM, which governments are slowly forcing companies to do, is expected to increase demand for Revit over the next decade.
Two other important growth drivers for Autodesk will come from Fusion 360 and Autodesk Construction Cloud (ACC). Fusion 360 is a cloud-based design platform for mechanical, electrical, and manufacturing engineers. The platform is young but growing like gangbusters, hitting 198,000 subscribers last quarter. ACC is also a new division with tools for on-site construction workers that aim to connect building design (done through AutoCAD and Revit) to the actual construction process. Management says the division continues to grow rapidly, albeit from a small base.
All of these software products add up to strong revenue and cash generation. In this fiscal year, management expects Autodesk to generate free cash flow of just over $2 billion while facing strong foreign currency headwinds . Through fiscal 2026, forecasts call for double-digit free cash flow growth. With a market capitalization of $41 billion, the stock trades at a forward P/FCF ratio of 20. That’s not terribly cheap, but given Autodesk’s growth history and expectations looking ahead, shareholders who hold for the long term should do well .
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Brett Schaefer holds positions at Autodesk. The Motley Fool holds positions and recommends Adobe Inc., Autodesk, and Microsoft. The Motley Fool recommends the following options: $420 long calls in January 2024 on Adobe Inc. and $430 short calls in January 2024 on Adobe Inc. The Motley Fool has a disclosure policy.
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