During down markets, investors tend to transition from a capital appreciation mindset to capital preservation mode. Like most bear markets, 2022 has followed that playbook which can be illustrated by the mass exodus from aggressive growth-oriented stocks toward lower-octane, large-cap value stocks. For example, at the time of this writing, a traditional value stock like
Coca-Cola
KO
is merely off its all-time high by 5%. Meanwhile,like most high-valuation industry groups in 2022, the Internet – Software Group has been punished over the past year. Year-to-date, the Internet Software Industry Group is lower by nearly 60% – racking up losses equating to more than four times that of the S&P 500 Index. As investors look ahead to 2023, they should ask themselves: “Is the Internet – Software Group a victim to general market circumstances, or is the poor price action representative of group-specific problems?”
Splunk Earnings: A Turning Point for Software?
Thursday’s action in the Software Group seemed to point to the former. Several stocks saw strong price and volume action after reporting surprisingly profitable earnings, led by Splunk.
Splunk
SPLK
develops software that enables organizations to gain insights into their business by accessing, managing, and analyzing data in real-time. Late Wednesday, the beaten-down software firm reported quarterly earnings of $0.83 per share, handily beating Zack’s Consensus Estimates of $0.23 per share by 97% when adjusted for non-recurring items. Top-line numbers also surprised, beating Zacks Consensus Estimates by 9.91%. Splunk’s revenues came in strong at $929.77 million, a healthy increase of 40% year-over-year. Thursday, investors rewarded the growth accordingly, sending shares higher by nearly 18% on volume turnover, equating to nearly three times the norm.
Beyond the robust earnings reported for the current quarter, management provided a rosy outlook. Despite the current macroeconomic headwinds, the company upped its guidance for 2023. Previously, total revenues for the full year 2023 were expected to be between $3.35 billion and $3.4 billion; however, now the company is anticipating total revenue to be between $3.455 billion and $3.485 billion. Though top-line numbers impressed, perhaps the most significant surprise came from efficiency and cost savings expectations. Non-GAAP operating margins are expected to grow to 12% from 8%. Splunk President and CEO Gary Steele said, “In addition to our strong top-line results, we also made good progress on our expense reduction during the quarter. As a result, we are increasing our full-year outlook for total revenues, profitability, and free cash flow.”
Box Punches its way to a Profit
Box Inc
BOX
is a software platform that allows companies to manage internal and external data, content and store files in the cloud. Since the Covid Crash, Box has been an elite performer, rallying from a spike low of $8.64 to over $29 presently. While most tech stocks bottomed in October with the Nasdaq, Box saw its lows back in July and never looked back – a subtle sign of strength. Like Splunk, the outperformance can be traced to the company’s ability to produce a profit in a shaky macroeconomic climate. In fact, in some ways, the turbulent economic times may be working in the company’s favor. In the Q3 conference call, CEO and co-founder Aaron Levie stated that “As companies prioritize strategic IT initiatives that allow them to efficiently lower IT expenses, the Box Content Cloud enables enterprises to streamline their businesses, drive up productivity, reduce risk, and lower costs. With our industry-leading platform, Box is very well-positioned to execute through these dynamic times. As we continue to build an enduring business for the long run, we remain hyper-focused on driving growth and even greater profitability.”
Box’s third-quarter numbers back up the CEO’s point. Earnings for the quarter came in at $0.31 per share, marking a 40.9% jump on a fiscal basis and surpassing Zacks Consensus Estimates by 3.3%. While total revenues missed consensus estimates by a hair, the company grew its top line by 11.6% year over year. Customer acquisition and retention also drove results. Thursday, shares leaped 6.45% on double the average trading volume. After years of price consolidation, Box is now attempting to break out over its IPO price high. Box has registered double-digit revenue growth for seven straight quarters and double-digit EPS growth for three quarters in a row. The consistent growth, high expectations for the future, and relative price strength make Box a top option for investors looking to gain exposure to the Internet – Software Group.
Asana Punished as Losses Widen
Asana Inc
ASAN
is another member of the Zacks Internet – Software Group. The company provides a software platform that enables management teams to coordinate projects and employee tasks. Since last year, shares have seen quite the fall from grace, cratering from a high of over $145 to under $20 presently. After the close Thursday, Asana reported Q4 loss of $0.26 versus the Zacks Consensus Estimate of a loss of $0.32. Revenues jumped to $141.44 million from $100.34 million last year, coming in line with Zacks Consensus Estimates. Despite the revenue growth, investors punished the stock by 14% on Friday morning. Asana has yet to turn a profit as a public company.
Profitability is Paramount
In 2011 Silicon Valley legend Marc Andreesen correctly predicted that “Software is eating the world.” Since then the market has rewarded software investors with a plethora of multi-bag moves in the space. With that said, the software space has matured, and the macroeconomic climate has worsened. The recent batch of Internet – Software earnings has sent a clear message to prospective software investors: now is not the time to be throwing darts. The market is rewarding profitability and bottom-line growth. Prospective investors should be gravitating toward quality software names such as Splunk and Box that are able to turn the “profit spigot” on while avoiding riskier, unprofitable names such as Asana. The Zacks Internet – Software Group is currently ranked in the top 22% of industries.
Zacks Names “Single Best Pick to Double”
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