12 Best Software Infrastructure Stocks to Buy

Published on May 27, 2023 at 11:55 am by Fahad Saleem in Hedge Funds, News

In this article, we will take a look at the 12 best software infrastructure stocks to buy. To see more such companies, go directly to 5 Best Software Infrastructure Stocks to Buy.

One of the industries that have benefitted directly from the technology boom over the past few years is software infrastructure. Tech and non-tech companies need software infrastructure and solutions to run their business smoothly. Companies spend a fortune on servers, migration to Cloud, network monitoring and management, internal and external communication software, software delivery and bug tracking, error handling and IT operations. All of this comes under the broader umbrella of software infrastructure.

T. Rowe Price in a report published in March 2021 highlighted the importance of investing in the software infrastructure space since the firm believes companies powering the “digital economy” will enjoy massive growth in the years to come. The firm noted how the Cloud computing revolution “upended” giants like SAP and Oracle which were focused on on-premise software and forced them to make massive changes in their business. T. Rowe said these giants were challenged by companies like Workday, ServiceNow, and Salesforce.com (T. Rowe said it was an early investor in these firms).

T. Rowe explained why it’s bullish on the software infrastructure industry in these words:

The suppliers of technologies enabling this transformation are a key focus of our portfolios. We pursue companies that provide the key infrastructure and services for enterprises seeking to digitalize their businesses. In our view, firms providing crucial software, cloud resources, and cybersecurity could be poised to enjoy years of solid growth as technology deepens its impact on revenue, cost savings, and competitiveness.

The Cloud Infrastructure Industry

One of the biggest segments of the software infrastructure market is the Cloud infrastructure industry. More and more companies are embracing Cloud every day for their business needs to cut costs and improve efficiency. While Cloud infrastructure market recently felt the heat due to a slowdown in Cloud spending on the back of rising inflation, analysts believe the industry will soon come out of the slowdown.

According to a report from Synergy Research Group, enterprise spending on Cloud infrastructure in the first quarter of 2023 stood at $63 billion, a massive increase from $10 billion recorded in the first quarter of last year. The Cloud infrastructure market is highly saturated, with the top three players (Amazon, Microsoft and Google) taking up about 65% share.

Software Infrastructure Industry Outlook: 2023 and Beyond

Talking to Bloomberg earlier this year, Mandeep Singh, a senior technology analyst, said that the infrastructure software domain spans four major areas: databases, system software, DevOps and cybersecurity. Singh said that the latest pullback in tech stocks has created a lot of difference between the valuations and fundamentals of some of the top companies in the infrastructure software space. Singh believes several of these companies have “non-discretionary” capabilities and pricing power. He sees 35%-40% topline growth potential and believes these stocks won’t stay suppressed for too long since he thinks up to 70% decline in the space is not representative of the actual value of these stocks.

Singh talked about the possibility of M&A activity and consolidation in the infrastructure software industry in the near future since he believes major companies like Microsoft and Atlassian who are “bundling” a lot of solutions in their offerings are making services like Asana, Monday.com, Smartsheet “redundant.”

Singh is highly bullish on the cybersecurity segment of the infrastructure software market since he believes the presence of sophisticated attacks and the “fear of losing intellectual property” are forcing spending in the sector and we are expected to see robust growth in the industry. He especially talked about CrowdStrike and Zscaler and highlighted their “positive revisions.”

Perhaps the biggest player in the Cloud infrastructure domain in Amazon.com, Inc. (NASDAQ:AMZN), which has big plans for the future, especially after the arrival of generative AI capabilities on the scene. Amazon.com, Inc. (NASDAQ:AMZN) CEO Andy Jassy has been emphasizing the growth opportunities AWS has over the past few months. He talked about Cloud infrastructure and AI-related capabilities in the company’s latest earnings call:

One of the great attributes of the cloud is that you can scale seamlessly up or down as demand dictates, which is not the case with on-premise’ infrastructure. Customers want help finding ways to spend less during this challenging time. And given that it’s best for customers long term, we’ve been actively helping customers make these adjustments. We’ve spent a fair bit of time analyzing what we’re seeing, and I’ve spent a good chunk of time myself looking as well, and we like the fundamentals of what we’re seeing in AWS.

The new customer pipeline looks strong. The set of ongoing migrations of workloads to AWS is strong. The product innovation and delivery is rapid and compelling. And people sometimes forget that 90-plus percent of global IT spend is still on-premises. If you believe that equation is going to flip, which we do, it’s going to move to the cloud. And having the cloud infrastructure offering with the broadest functionality by a fair bit, the best securing operational performance and the largest partner ecosystem bodes well for us moving forward. But we’re not close to being done inventing in AWS. Our recent announcement on Large Language Models and generative AI and the chips and managed services associated with them is another recent example.

For this article we scanned Insider Monkey’s database of 943 hedge funds updated as of the end of March 2023 and picked 12 software infrastructure stocks with the highest number of hedge fund investors. Some notable names include Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and Palo Alto Networks Inc. (NYSE:PANW).

Best Software Infrastructure Stocks to Buy

12. Hewlett Packard Enterprise Company (NYSE:HPE)

Number of Hedge Fund Holders: 37

Hewlett Packard Enterprise Company (NYSE:HPE) provides software-define infrastructure (SDI) solutions for businesses to help them manage their networking, storage, automation, and overall software development and deployment. Hewlett Packard Enterprise Company (NYSE:HPE) is known for HPE OneView, which is an integrated IT infrastructure software that uses automation to solve key software infrastructure problems.

Out of the 943 hedge funds tracked by Insider Monkey, 37 hedge funds had stakes in Hewlett Packard Enterprise Company (NYSE:HPE) at the end of the first quarter of 2023. The biggest stakeholder of Hewlett Packard Enterprise Company (NYSE:HPE) during this period was Richard S. Pzena’s Pzena Investment Management which owns a $208.4 million stake in the company.

11. Zscaler, Inc. (NASDAQ:ZS)

Number of Hedge Fund Holders: 38

Zscaler, Inc. (NASDAQ:ZS) focuses on the security side of software infrastructure since it’s primarily a Cloud security company. It’s known for its Cloud infrastructure modernization solution called The Zscaler Zero Trust Exchange. Zscaler also provides Infrastructure as Code services to provide Cloud security.

38 out of the 943 hedge funds in Insider Monkey’s database of hedge funds had stakes in Zscaler, Inc. (NASDAQ:ZS) as of the end of the first quarter of 2023. The most notable hedge fund stakeholder which had stakes in Zscaler, Inc. (NASDAQ:ZS) was John Overdeck and David Siegel’s Two Sigma Advisors which owns a $122 million stake in the company.

Artisan Global Discovery Fund made the following comment about Zscaler, Inc. (NASDAQ:ZS) in its Q4 2022 investor letter:

“Zscaler, Inc. (NASDAQ:ZS) provides cloud-based Internet security solutions. In the quarter, it announced 54% revenue growth and expected growth of nearly 40% in 2023 (ahead of expectations). Despite solid fundamental momentum, shares have underperformed this year as investors have grown concerned about slowing demand for enterprise software as the broader global economy slows. We believe the dual trends of rising security vulnerability and increased enterprise digitization will lead to sustained demand, even in a recession. Cybersecurity remains a top concern for businesses and governments alike as cyberattacks can have devastating financial and reputational consequences. Meanwhile, managing the security needs of legacy on-premise applications, a growing number of cloud-based applications (Office 365, Salesforce, etc.) and a more remote workforce (versus pre-pandemic) make operating IT infrastructures increasingly complex. Give the attractive long-term outlook and depressed valuations, we added to the position.”

10. Splunk Inc. (NASDAQ:SPLK)

Number of Hedge Fund Holders: 49

Splunk Inc. (NASDAQ:SPLK) is known for its infrastructure monitoring solutions that help businesses see their systems’ backend in real time, detect and resolve solutions. Splunk Inc. (NASDAQ:SPLK) is up 8% year to date through May 24.

A total of 49 hedge funds tracked by Insider Monkey had stakes in Splunk Inc. (NASDAQ:SPLK) as of the end of the first quarter. The biggest stakeholder of Splunk Inc. (NASDAQ:SPLK) was Jeffrey Smith’s Starboard Value LP which owns a $439 million stake in the company.

Vulcan Value Partners made the following comment about Splunk Inc. (NASDAQ:SPLK) in its Q4 2022 investor letter:

“We exited our position in Splunk Inc. (NASDAQ:SPLK) during the quarter. A number of developments caused us to question whether Splunk’s competitive position was eroding. Splunk is a premium product, and less expensive alternatives have made progress increasing the quality of their offerings. Our research has confirmed Splunk is losing market share to these players, including Microsoft’s Sentinel. Sentinel has made a number of improvements over time and integrates with Microsoft’s other products. Notably, both of Splunk’s Co-Presidents left Splunk in 2022 to work for Microsoft. Splunk’s Chief Financial Officer left a few months later. Before the CFO left, Splunk lowered its annual recurring revenue guidance for the year. While the company attributed the change to the macro environment, we were unable to differentiate to what extent the slowdown was caused by the macro environment versus competitive factors. Based on our primary research and competitive concerns, we no longer had sufficient confidence in Splunk’s value stability. Splunk no longer qualifies for investment, and we exited the position.”

9. International Business Machines Corp. (NYSE:IBM)

Number of Hedge Fund Holders: 49

International Business Machines Corp. (NYSE:IBM) is the biggest provider of Infrastructure as a Service (IaaS) solutions. International Business Machines Corp. (NYSE:IBM) provides consultancy and deployment solutions related to Cloud infrastructure, storage, networking, AI infrastructure deployment, among other services.

Insider Monkey’s database of 943 hedge funds tracked as of the end of the first quarter of 2023 shows that 49 hedge funds had stakes in International Business Machines Corp. (NYSE:IBM), up from 43 hedge funds in the previous quarter. This shows International Business Machines Corp. (NYSE:IBM) saw a jump in hedge fund sentiment.

8. Cisco Systems, Inc. (NASDAQ:CSCO)

Number of Hedge Fund Holders: 61

Cisco Systems, Inc. (NASDAQ:CSCO) provides various solutions for software infrastructure related to virtualization, networking, data centers, performance optimization and more. It is one of the oldest and strongest players in the industry. Earlier this month Cisco Systems, Inc. (NASDAQ:CSCO) posted fiscal third quarter results. Cisco Systems, Inc. (NASDAQ:CSCO)’s software revenue jumped 18% year over year. Revenue in the period increased by 13.5% year over year to $14.57 billion.

Cisco Systems, Inc. (NASDAQ:CSCO), however, saw a dip in hedge fund sentiment in the first quarter. There were 61 hedge funds in Insider Monkey’s database that had stakes in Cisco Systems, Inc. (NASDAQ:CSCO) at the end of the first quarter, down from 70 funds in the previous quarter.

Artisan Value Fund made the following comment about Cisco Systems, Inc. (NASDAQ:CSCO) in its Q4 2022 investor letter:

“We had one sale this quarter, exiting network equipment company Cisco Systems, Inc. (NASDAQ:CSCO). We chose to use the proceeds on more attractive value opportunities as Cisco’s growth has come in below what we had hoped for, and the company is increasingly looking at M&A to augment its growth rate.”

7. Oracle Corporation (NASDAQ:ORCL)

Number of Hedge Fund Holders: 67

Oracle Corporation (NASDAQ:ORCL) is a one-stop shop for software infrastructure solutions and services. The Oracle Cloud Infrastructure (OCI) provides complete solutions for Cloud deployment, including services related to servers, storage, network, applications and services. Some of the top companies in the world are using OCI and Oracle Cloud services, including Uber, Zoom, Toyota, Cox Automotive, Cognizant, among others.

A total of 67 hedge funds tracked by Insider Monkey had stakes in Oracle Corporation (NASDAQ:ORCL) as of the end of the first quarter of 2023. The total worth of these stakes was about $3 billion. The biggest hedge fund stakeholder of Oracle Corporation (NASDAQ:ORCL) was Jean-Marie Eveillard’s First Eagle Investment Management which owns a $1.9 billion stake in the company.

Madison Sustainable Equity Fund made the following comment about Oracle Corporation (NYSE:ORCL) in its Q1 2023 investor letter:

“During the quarter, we established a new position in Oracle Corporation (NYSE:ORCL) as the company’s growth profile has improved from a low single digit revenue growth company to high single digits. The key drivers of improved growth come from the company’s Software-as-a-Service applications and the Oracle Cloud Infrastructure (OCI). Oracle’s software applications power the Enterprise Resource Planning and Human Capital Management functions of large and small-to-medium sized businesses and are growing in the mid-teens. OCI is a differentiated cloud infrastructure provider that is gaining share due to its strong value proposition in speed, performance, and security. In addition, we believe that the company’s operating margins will improve from scale benefits in OCI and cost efficiencies from its recent acquisition of Cerner.”

6. VMware, Inc. (NYSE:VMW)

Number of Hedge Fund Holders: 68

VMware, Inc. (NYSE:VMW) provides various solutions for software infrastructure deployment and management, including desktop hypervisor solutions, Cloud infrastructure solutions for Azure, AWS and other Cloud platforms, Cloud automation and more.

Insider Monkey’s database of 943 hedge funds shows that 68 hedge funds had stakes in VMware, Inc. (NYSE:VMW) as of the end of the first quarter of 2023. The biggest stakeholder of VMware, Inc. (NYSE:VMW) was Silver Lake Partners which had a stake worth over $5 billion in the company.

Like Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and Palo Alto Networks Inc. (NYSE:PANW), VMW is one of the best software infrastructure stocks to buy according to hedge funds.

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