Lately it has been difficult to be a software investor.
MarketBeat.com – MarketBeat
Year-to-date, the S&P GSTI Software Index is down 30%, slightly worse than the broader technology sector† Enterprise, app development, system infrastructure and productivity software companies have seen billions of dollars lose in their valuations.
Fortunately, there is light at the end of the tunnel.
According to Statista, the global software industry will grow at about 6% per year over the next five years, reaching $800 billion by 2027. Growth will largely be driven by the digital transformation unfolding globally as companies strive to become more automated, efficient and competitive.
Last week, a few suppressed software names with good long-term growth prospects flashed signs of life. Web builder Squarespace and mobile tech provider AppLovin staged two-day rallies of 59% and 45% respectively. This is why the renewed interest in these stocks can only get stronger.
Why has Squarespace stock gone up?
Squarespace, Inc. †NYSE: SQSP† posted a beat-and-raise quarter that sent the market buzzing about a potential turning point for a stock that had fallen 70% since last year’s IPO. Adding to the sudden bullish sentiment was the company’s announcement of a $200 million share buyback program, meaning management believes it is undervalued†
Strong demand for building websites and e-commerce tools drove customers to Sqaurespace’s all-in-one platform, generating record sales of $208 million. The revenue result surpassed consensus by about $4 million and showed that small business and businesstraverse.com interest in web subscriptions has remained robust some two years since the start of the pandemic. The number of unique Squarespace subscriptions increased by 10% to 4.2 million.
Management raised its full-year revenue forecast to $873 million midway through in anticipation of continued demand for its services. While some selling companies took a cautious tone after the report, others were quick to call Squarespace a buy. JMP Securities offered a price target of $45, suggesting the stock may still double from its current level.
Squarespace faces a lot of competition in this space, with companies like Wix and GoDaddy being considered established brands. However, there seems to be room for multiple winners in an industry that has been booming alongside the online shopping boom. Squarespace’s easy-to-use templates and drag-and-drop features resonate well with people who want to create their own online presence but lack formal training in web design. The stock is also starting to resonate with investors.
Will AppLovin Stock Continue to Rise?
AppLovin Corporation (NYSE: APP† debuted in the public markets shortly before Squarespace and also saw its share price drop below the IPO price. A pivot may have occurred after the company’s first quarter update. However, it was not the financial figures that caught the interest of the market. Management even lowered its revenue forecast for 2022.
In a letter to shareholders, the app revenue specialist said it is considering a sale of its Apps business. AppLovin’s MAX, which helps developers of all shapes and sizes use in-app bidding to maximize revenue, has become a popular solution worldwide. Because the company has reached critical mass with its technology, it is less dependent on the data from Apps. It said it therefore plans to operate Apps as “a standalone company”, effectively dangling it from potential candidates.
Investors were optimistic about the news for two reasons. First, if sold, the Apps business will likely fetch a pretty penny, given its widespread presence in many industries. Second, Apps generates lower margins than AppLovin’s software business. This means the company appears to be focusing on higher-margin businesses — and profitability could come sooner than expected.
While EBITDA has grown nicely in recent quarters, AppLovin posted a much steeper-than-expected loss in the first quarter. This shows that the more profitable software business is being held back by the highly competitive and less lucrative apps business. By divesting apps, the company could prioritize profits when determining its growth strategy for the coming years. Based on annual forecasts, PC and mobile gaming apps will account for more than 60% of sales this year.
But it’s AppLovin’s fast-growing mobile marketing platform that investors should be excited about. The AppDiscovery software, powered by the MAX monetization solution and the attribution customization tool, will both benefit from the proliferation of mobile apps. It is a market that Grand View Research estimates will grow at an annual rate of 11.5% through 2027. As the internet and smartphones reach more corners of the globe, AppDiscovery’s machine learning capabilities should play an important role.
Meanwhile, Wall Street is turning bullish on AppLovin. bank of America upgraded from neutral to buy last week, becoming the last to predict a reversal. This month alone, seven out of seven analysts have issued buy ratings, including Credit Suisse, which sees the stock return to $100.
