The heightened demand for cloud-based applications that facilitate remote working and increase the efficiency of business processes is driving the software-as-a-service (SaaS) industry’s growth. Because companies have been delaying their office reopening plans owing to the resurgence of COVID-19 cases, companies that provide SaaS should continue  thriving. 

The global SaaS market is expected to grow at a 12.5% CAGR to  $436.9 billion by 2025.

However, not all companies in this space are well-positioned to capitalize on the industry tailwinds. Efficient operations and strong financials should help the shares of QAD Inc. (QADA) and Absolute Software Corporation (ABST) soar in price in the coming months. In contrast, we think their declining financials could cause Workiva Inc. (WK) and Paycor HCM, Inc. (PYCR) to witness a downtrend in the near term.

Click here to check out our Software Industry Report for 2021

Stocks to Buy:

QAD Inc. (QADA)

QADA in Santa Barbara, Calif., provides cloud-based enterprise software solutions for global manufacturing companies across the automotive, life sciences, consumer products, food and beverage, high technology, and industrial products industries. The company markets its products through direct and indirect sales channels and distributors and sales agents.

On September 14, 2021, SBM Life Science, a leading gardening and home protection company, chose QADA’s QAD DynaSys Demand Planning and Advanced Analytics in the cloud to simplify, organize, fluidify and anticipate its sales forecasts, as well as its inventory management analyses, to support its customers better regarding the needs of online and in-store consumers. By supporting the digital transformation of its supply chain and planning structure, QADA expects to maintain a long-term partnership with SBM.

QADA’s total revenues for its fiscal half-year ended June 30, 2021, increased 14.5% year-over-year to $84.84 million. The company’s gross profit came in at $50.55 million, representing a 16.9% rise from the prior-year period. It had $136.49 million in cash and cash equivalents as of July 31, 2021.

Analysts expect QADA’s revenue to increase 6.9% year-over-year to $81.97 million in the current quarter, ending October 31, 2021. It surpassed the Street’s EPS estimates in each of the trailing four quarters. QADA’s EPS is expected to grow at a 10% rate per annum over the next five years. The stock has gained 108.1% in price over the past year and 13.4% over the past three months. It closed yesterday’s trading session at $87.35.

QADA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

QADA has an A grade for Quality, and a B grade for Growth and Sentiment. In the 147-stock Software - Application industry, it is ranked #10.

To see additional POWR Ratings for Value, Momentum, and Stability for QADA, click here.

Absolute Software Corporation (ABST)

Based in Canada, ABST develops, markets, and provides cloud-based endpoint visibility and control platforms for the management and security of computing devices, applications, and data for enterprise and public sector organizations. The company offers monitoring, auditing, theft deterrence, and recovery services.

On August 30, 2021, ABST released the Absolute DataExplorer, a unique and flexible endpoint data exploration tool that enables organizations to align their expansive, on-demand endpoint telemetry with their evolving business requirements. Amid the adoption of hybrid working models, ABST’s ability to capture critical data points from their endpoint environment will help their IT and security teams to find inefficiencies and opportunities for cost savings and strengthen overall data and device protection.

During its  fiscal fourth quarter, ended June 30, 2021, ABST’s revenue increased 17% year-over-year to $31.78 million. The company’s gross profit came in at $27.30 million, indicating a 139% rise from the prior-year period. ABST had $140.17 million in cash and cash equivalents as of June 30, 2021.

Analysts expect ABST’s revenue to be  $47.66 million for the current quarter, representing a 67.3% rise from the prior-year period. The stock surpassed consensus EPS estimates in three of the trailing four quarters. ABST has gained 15.5% in price over the past year and 1.3% over the past month. It ended yesterday’s trading session at $11.69.

ABST’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy. ABST has an A grade for Quality, and a B grade for Value and Stability. Furthermore,  it is ranked #14 of 147 stocks in the Software - Application  industry.

In addition to the POWR Ratings grades we’ve highlighted, one can see ABST’s ratings for Growth, Sentiment, and Momentum, here.

Stocks to Avoid:

Workiva Inc. (WK)

WK provides cloud-based compliance and regulatory reporting solutions for improving productivity, accountability, and insight into business data of enterprises, government agencies, and higher education institutions worldwide. The Ames, Iowa, company offers software to collect, manage, report, and analyze business data in real-time.

WK acquired next generation iPaaS provider OneCloud on August 2, 2021, to accelerate customers’ digital transformations by enabling them to make smarter and faster decisions for better business outcomes. The acquisition further solidifies and accelerates WK’s position as a leading cloud platform for financial, regulatory, and operational reporting.

WK’s total operating expenses rose 10.7% year-over-year to $86.74 million for its fiscal second quarter, ended June 30, 2021. The company had $322.19 million in cash and cash equivalents as of June 30, 2021.

WK’s EPS is expected to remain negative in the coming quarters of the current year. However, the stock has gained 13.8% in price over the past month to close yesterday’s trading session at $150.69.

WK’s weak prospects are reflected in its POWR Ratings. The stock has a D grade for Value. In addition, it is ranked #21 of 60 stocks in the Software - Business industry.

To see additional POWR Ratings for WK’s Quality, Growth, Stability, Sentiment, and Momentum, click here.

Paycor HCM, Inc. (PYCR)

PYCR provides software-as-a-service (SaaS) human capital management (HCM) solutions for small- and medium-sized businesses (SMBs). It offers a cloud-native platform to address the comprehensive people management needs of SMB leaders, and payroll workflows and to help achieve regulatory compliance. The Cincinnati, Ohio, company went public on July 20, 2021.

On January 28, 2021, PYCR completed its SOC 2 Type II Service Organization Control (SOC 2) examination of its SaaS products in accordance with attestation standards established by the American Institute of Certified Public Accountants (AICPA). This attestation ensures its commitment to deliver the highest level of service and standards.

For the fiscal fourth quarter, ended June 30, 2021, PYCR’s adjusted operating income came in at $219,000, indicating a 98.1% year-over-year decline. The company’s adjusted net income decreased 99% from the prior-year period to $115,000. Its loss per share increased 35.3% year-over-year to $0.23. The company had $2.63 million in cash and cash equivalents as of June 30, 2021.

PYCR’s EPS is expected to decline 16.2% year-over-year in the current year. Over the past month, PYCR lost 11.6% in price to end yesterday’s trading session at $31.06.

PYCR’s POWR Ratings are consistent with this bleak outlook. The stock has a Value grade of D. Moreover, it is ranked #68 of 147 stocks in the Software - Application industry.

In addition to the POWR Rating grades we’ve highlighted, one can see PYCR’s ratings for Growth, Momentum, Sentiment, Stability, and Quality here.

Click here to check out our Software Industry Report for 2021

WK shares were unchanged in after-hours trading Thursday. Year-to-date, WK has gained 63.72%, versus a 20.39% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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