2 Best Software Stocks to Buy in 2022 and Beyond

The software industry in general has been struggling lately. In fact, the ETF iShares Expanded Tech Software Sector (IGV -3.06% )which closely tracks the returns of most US-traded software stocks, is down more than 25% in the past four months.

With this rapid industry-wide decline, many companies participated in the sale despite impressive financial results. Two in particular are Procore Technologies (PCOR -6.24% ) and Dropbox Inc. ( DBX -3.51% ). Let’s see why this recent turmoil offers good entry opportunities for these two companies.

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Procore provides cloud-based collaboration and workflow software to the construction industry. With the Procore platform, everyone on a project, from architects to general contractors, can stay connected whether they’re in the office or on the job site. The platform also spans the lifecycle of a construction project, from bid management and labor productivity to the company’s flagship project management solution. Overall, Procore ultimately serves as a unified digital system of record for the complex and fragmented construction industry.

Today, Procore has more than 12,000 customers, but its management team still believes the company is in its infancy. In fact, on Procore’s last quarterly conference call, CEO Tooey Courtemanche said that Procore’s current market share in the US general contractor space is only 25%, the rest of the market mainly relying on legacy solutions. Additionally, according to McKinsey’s Industry Digitization Index, construction is the second least digitized industry in the world, despite accounting for 7% of the global workforce and 13% of global output. .

But Procore isn’t just growing on new customers. It also brings increasing value to those that already exist. During the last quarter, the number of customers contributing $1 million or more in annual recurring revenue increased by 50% as usage of the full Procore product line increased. Additionally, Procore is constantly adding new products and integrations like it did with its recent acquisition of Levelset, which helps users stay compliant with privileges so they can get paid faster.

While Procore’s current enterprise value (market cap minus net cash) of approximately $7 billion might seem like a steep price to pay compared to its projected 2022 revenue of $661-666 million, the industries reliance on legacy systems provides a lot of green grass for Procore. As construction industry systems continue to become more digital, I expect Procore to be able to grow double-digit sales for many years to come.

drop box

Unlike Procore, Dropbox – which provides content collaboration and document workflow software for teams of all sizes – doesn’t seem to have as much customer growth potential ahead of it. Virtually every organization today uses some form of content collaboration system, whether it’s Google Drive or Microsoftit’s (MSFT -1.93% ) OneDrive. This means that there is not as much fruit at hand in terms of new customers for Dropbox as there is for Procore. However, this should in no way prevent investors from owning shares.

In fact, a closer look shows that Dropbox’s business model has been quite resilient. With the platform’s holistic suite of tools ranging from digital signatures to secure document sharing or even file searching, Dropbox has everything a team could need to work effectively together. This focus on adding value to team workflows also showed up in the bottom line. Not only are Dropbox customers staying, but overall they’ve also demonstrated a willingness to pay more for it. Indeed, this year, despite a price increase of almost 4%, the company has seen its churn rate decrease each quarter.

And since Dropbox doesn’t require a lot of additional costs for its new customers, the company has generated more and more cash as it has grown over the past few years. In the past 12 months, Dropbox generated $708 million in free cash flow, 80% more than it generated two years prior.

Along with all that excess cash, Dropbox also started returning capital to shareholders in the form of buyouts — and lots of them. Over the past year, Dropbox has reduced the total number of shares outstanding by 8%, which has helped increase total free cash flow per share by approximately 57% over the same period. But management isn’t slowing the pace of its takeover either. Last quarter, the board authorized an additional $1.2 billion share buyback program on top of the remaining $344 million. Together, this equates to 19% of the company’s current market cap.

Between the stability of Dropbox’s digital business and the significant headroom offered by the company’s buyout program, Dropbox looks poised to deliver attractive returns to shareholders over the next few years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Myra R.

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