There are close to 250 publicly traded software stocks. With so many to choose from, it can be difficult for investors to sort the good from the bad.
So, this week, to shed some light on the sector, three Motley Fool contributors ranked their top picks right now. Here they are.
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The zero trust stock winning the confidence of investors -- and topping the list
Will Healy (Zscaler): Cybersecurity is critical to the success of the cloud, and Zscaler (ZS +8.69%) emerged as one of the more prominent companies in this space. Its software provides what has become known as "zero trust" security.
NASDAQ: ZS
Key Data Points
Under the zero trust approach, the system assumes every user logging on to a network is a threat, and the user confirms their credentials through characteristics such as specific devices and locations to identify users. Additionally, one's rank in an organization will often determine the degree of access, a feature that can limit damage when security breaches occur.
Admittedly, Zscaler's first-mover status in zero trust has not prevented CrowdStrike, Palo Alto Networks, and other peers from offering competing products. However, Fortune Business Insights forecasts a compound annual growth rate (CAGR) for this industry of 14% through 2030. Such increases should boost Zscaler and its peers for the foreseeable future.
The necessity of cybersecurity software also mitigated much of the adverse effects of the tech downturn. Consequently, Zscaler's growth exceeded the forecasted CAGR. In fiscal 2023 (ended July 31), revenue came in at $1.6 billion, 48% more than in fiscal 2022.
This did not prevent a net loss of $202 million. Although Zscaler limited expense growth and nearly cut losses in half from year-ago levels, the $458 million in stock-based compensation expenses continued to weigh on the bottom line.
Furthermore, Zscaler projects around $2.06 billion in revenue for fiscal 2024. Though that 27% rise signifies a slower pace in increases, it should significantly improve the company's financials and, by extension, the cybersecurity stock.
Given such potential, one can understand the increase of over 65% in the stock price this year, a move that took the price-to-sales (P/S) ratio to 17. Although that valuation may sound high, it is low by historical standards and could bolster the stock as organizations continue to adopt cloud platforms and demand zero trust security.
After posting another fantastic quarter, Duolingo is poised for another year of rapid growth
Jake Lerch (Duolingo): Simply put, Duolingo (DUOL +7.83%) is one of the best-performing stocks of 2023 and looks poised to continue its run for some time.
NASDAQ: DUOL
Key Data Points
The company operates an interactive language-learning app that offers courses in more than 40 languages. Users can join for free and unlock certain features and power-ups through a paid subscription. Duolingo keeps users engaged and learning by utilizing a gamified approach -- where users progress through the learning courses in a manner similar to a video game. What's more, by placing users into leagues and encouraging social networking, the app encourages users to keep up their progress and share their achievements.
As a result, Duolingo is a smash hit -- both with the public and on Wall Street. In its most recent quarter (the three months ending on Sept. 30, 2023), Duolingo reported astounding results that blew away consensus estimates. Highlights included:
- Revenue growth of 43% to $138 million.
- Daily active users (DAUs) growth of 63% to 24 million.
- Paid subscriber growth of 60% to 5.8 million.
In addition, the company raised full-year guidance to around $525 million -- more than previous Wall Street estimates of $515 million.
Due to its app's popularity and subsequent excellent financial results, Duolingo's stock soared an eye-popping 185% this year alone. Growth-oriented investors should keep it in mind if looking for a hyper-growth stock to hold for the long term.
Rounding out the list is this best-in-show workplace stock
Justin Pope (Monday.com): The economic climate has gotten dramatically harder over the past 18 months thanks to the Federal Open Market Committee's rapid interest rate hikes to fight inflation. Many software companies that soared in 2021 have seen growth slow due to higher rates.
Work management software company Monday.com (MNDY +3.66%) hasn't been immune to these forces. As you can see below, revenue growth has steadily slowed. However, there is evidence that Monday.com, which sells cloud-based software for managing projects and businesses, strongly resonates with its corporate customer base.
MNDY Revenue (Quarterly YoY Growth) data by YCharts
For starters, its customers are spending more money on the platform. In the third quarter, the number of paid customers spending more than $50,000 annually grew by 57% year over year. Additionally, those customers' net revenue retention (NRR) rate was over 115%. Monday.com's overall NRR was 110% in Q3, meaning the business could grow without adding new accounts.
Secondly, Monday.com is rapidly becoming a very profitable business. The company's Q3 free cash flow soared to $64.9 million from just $14 million a year ago. Companies are seemingly prioritizing spending on Monday.com, translating to growing profits.
The apparent value Monday.com's product brings to its customers bodes well for future growth opportunities. If interest rates relax down the road, revenue growth might even reaccelerate.
NASDAQ: MNDY
Key Data Points
The stock has a free-cash-flow yield of 2.1%, giving investors nearly the most cash profits for their money since the company went public. That could look cheaper in the future as cash flow continues piling up. Meanwhile, the stock price is over 60% off its former high. That seems bound to recover if Monday.com remains a crucial cog in the corporate workspace.
