12 Best Software Stocks To Buy According To Hedge Funds

Published on October 18, 2022 at 9:31 am by Umar Farooq in Hedge Fund Analysis, Hedge Funds, News

In this article, we discuss the 10 best software stocks to buy according to hedge funds. If you want to see more stocks in this selection, check out 5 Best Software Stocks To Buy According To Hedge Funds.

During 2022, the software industry is expected to generate $593.40 billion in revenue, according to Statista. Enterprise Software is the market’s largest category, with a $237.10 billion anticipated market size in 2022. Revenue is anticipated to expand at a compound annual growth rate (CAGR) of 6.50% from 2022 to 2027, with a market size of $812.90 billion by that year. In terms of worldwide comparison, the United States will produce the majority of revenue, comprising roughly $297.10 billion in 2022. Growth in emerging countries is comparable to that of developed markets because of the ongoing and increasing pace of the digital revolution.

The primary investment driver in the software sector is the digital transformation of businesses. Software concentrating on digitization, process automation, and data analytics is in high demand to boost productivity and acquire more company insights. The worldwide software business recovered from a modest drop brought on by the COVID-19 pandemic in 2020 to reach $565 billion in 2021. Both large, well-known enterprises and a number of smaller, niche software-producing businesses dominate the software market. Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Adobe Inc. (NASDAQ:ADBE), among others discussed in detail below, are major participants in the software industry.

Photo by Danial Igdery on Unsplash

Our Methodology

With this context in mind, here is our list of the 12 best software stocks to buy according to hedge funds. The aim of the article is to provide a basic rundown of the most popular software stocks among hedge funds. The list is compiled according to the number of hedge funds having stakes in each company. Data from the 895 funds tracked by Insider Monkey was used for this purpose.

Best Software Stocks To Buy According To Hedge Funds

12. Snowflake Inc. (NYSE:SNOW)

Number of Hedge Fund Holders as of Q2, 2022: 65

Snowflake Inc. (NYSE:SNOW) is a leading provider of cloud computing services and its cloud platform is optimized for running machine learning algorithms. Wall Street analysts are bullish on Snowflake Inc. (NYSE:SNOW). On October 11, Bernstein analyst Mark Moerdler initiated coverage of Snowflake with a Market Perform rating. On October 10, analyst Kingsley Crane of Canaccord began covering Snowflake Inc. (NYSE:SNOW) with a Buy rating and a $220 price target, up from $200. Crane said that Snowflake has demonstrated “a remarkable ability to grow at scale,” doubling total revenue each of the previous three fiscal years. He claims that the company’s FY29 financial projections are “surprisingly reasonable” and that this suggests that shares could rise from their current levels.

At the end of the second quarter of 2022, 65 hedge funds were long Snowflake Inc. (NYSE:SNOW) and held stakes worth $5.12 billion in the company. As of June 30, Altimeter Capital Management is the top shareholder in Snowflake Inc. (NYSE:SNOW) and has stakes worth $2.36 billion in the company.

Here is what Baron Funds had to say about Snowflake Inc. (NYSE:SNOW) in its second-quarter 2022 investor letter:

“During the quarter, we added to three of our cloud infrastructure positions – Snowflake Inc., Cloudflare, Inc., and Datadog, Inc.While investors are concerned that a weakening macroeconomic environment will be a near term headwind to growth as customers may slow down their cloud expansions, we remain focused on the long term – duration of growth, competitive advantages, and innovative capabilities and are happy to increase our positions at a more attractive price. For example, Snowflake, the leading data cloud provider, during its recent user conference, announced several new products, which significantly expand its addressable market…” (Click here to see the full text)

11. Sea Limited (NYSE:SE)

Number of Hedge Fund Holders as of Q2, 2022: 65

Sea Limited (NYSE:SE) engages in digital entertainment, e-commerce, and digital financial service businesses. At the end of the second quarter of 2022, 65 hedge funds in the database of Insider Monkey held stakes worth $2.7 billion in Sea Limited (NYSE:SE), compared to 77 in the previous quarter worth $5.1 billion.

Experts believe that although there are risks involved while investing in Sea Limited (NYSE:SE), its pricing, however, is ideal for including it in a portfolio of high-growth tech stocks. Even when applying cautious multiple assumptions, the stock is undervalued. On August 18, Barclays analyst Jiong Shao lowered his price target for Sea Limited (NYSE:SE) from $125 to $114 while maintaining an Overweight rating for the stock. The analyst believes that management’s decision to revoke Shopee’s fiscal 2022 sales projection is “sensible”, especially in light of the fact that “with many macro factors having become more uncertain in recent months,” such as currency and inflation.

In its Q1 2022 investor letter, Baron Funds, an asset management firm, highlighted a few stocks, and Sea Limited (NYSE:SE) was one of them. Here is what the fund said:

“Sea Limited (NYSE:SE), a global digital gaming and e-commerce company, detracted from performance for the period held. Similar to other online consumer businesses, Sea faced significant multiple compression in the quarter, exacerbated by a slowdown in user growth at its key Free Fire digital game and mounting investments in its e-commerce operation, particularly in new markets like Brazil. We exited our position as we lost confidence in the long- term unit economics in some of Sea’s new markets and were concerned by the simultaneous slowdown in revenue growth and increase in underlying cash burn.”

10. Take-Two Interactive Software, Inc. (NASDAQ:TTWO)

Number of Hedge Fund Holders as of Q2, 2022: 66

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is an American video game holding company that operates as a developer, publisher, and marketer of interactive entertainment for consumers around the globe. GTA franchise from Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is one of the most recognizable trademarks in the world, and it is anticipated that the firm would capitalize on this by incorporating a metaverse into the platform. GTA V has sold 170 million units so far, making it one of the most popular gaming brands worldwide.

On October 5, Take-Two was raised by Goldman Sachs analyst Eric Sheridan from Neutral to Buy with a $165 price target. In a research note, the analyst warns investors that while the gaming industry still faces a number of short-term fundamental headwinds, these headwinds are gradually being factored into stock prices.

As of Q2 2022, 66 of the 895 hedge funds tracked by Insider Monkey were bullish on Take-Two Interactive Software, Inc. (NASDAQ:TTWO), holding shares worth $2 billion. Take-Two Interactive Software, Inc. (NASDAQ:TTWO)’s largest investor in our database is Andreas Halvorsen’s Viking Global which owns 1.9 million shares that are worth $245 million.

Here is what Madison Funds specifically said about Take-Two Interactive Software, Inc. (NASDAQ:TTWO) in its Q2 2022 investor letter:

“Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is a leading publisher of video games. Take-Two has a reputation for the high quality of its games, having published industry favorites such as Grand Theft Auto and NBA2K.

The video game industry itself has shed much of its boom-and-bust patterns to become a steadier, more predictable business with high barriers to entry, established title franchises, and high levels of recurring, in-game revenue streams. The company has been investing heavily to step up the number of new title launches over the next few years, a favorable set-up which we believe is not fully reflected in its stock price.”

09. Atlassian Corporation Plc (NASDAQ:TEAM)

Number of Hedge Fund Holders as of Q2, 2022: 66

Atlassian Corporation Plc (NASDAQ:TEAM) is a cloud-computing company best known for its Jira software products. Wall Street anticipates growth in the cloud sector, particularly for Atlassian Corporation Plc (NASDAQ:TEAM). Peter Weed, an analyst at Bernstein, increased his price target for Atlassian Corporation (NASDAQ:TEAM) to $263 on August 12 and kept his buy-side Outperform rating on the stock. In September, Mizuho analyst Gregg Moskowitz maintained Atlassian Corporation Plc (NASDAQ:TEAM) Buy rating and a $360 price target.

Just like Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Adobe Inc. (NASDAQ:ADBE), Atlassian Corporation Plc (NASDAQ:TEAM) is one of the stocks that hedge funds are buying. At the end of the second quarter of 2022, 66 hedge funds held stakes in Atlassian Corporation Plc (NASDAQ:TEAM). The total value of these stakes amounted to $3.49 billion.

Here is what Artisan Partners had to say about Atlassian Corporation Plc (NASDAQ:TEAM) in its second-quarter 2022 investor letter:

“Atlassian Corporation Plc (NASDAQ:TEAM) is a leading provider of innovative, customizable team-collaboration software tools for over 200,000 customers. Despite positive fundamental momentum—the company recently reported 30% revenue growth and 28% trailing twelve months FCF margins—shares traded lower during Q2 as investors rotated out of high-growth stocks with elevated multiples. The company’s highly efficient sales and marketing capability, combined with substantial R&D investment, points to sustained long-term revenue and FCF growth. Meanwhile, we recognize a recession would likely have an impact on Atlassian via slowing growth metrics. However, we believe its low priced, mission critical cloud tools would prove relatively resilient in this scenario. For these reasons and shares trading at a very attractive valuation for a business with highly recurring revenues, strong revenue growth prospects and attractive margins, we added to our position.”

08. Oracle Corporation (NYSE:ORCL)

Number of Hedge Fund Holders as of Q2, 2022: 69

Oracle Corporation (NYSE:ORCL) offers products and services that address enterprise information technology environments worldwide. Investors can hold Oracle Corporation (NASDAQ:ORCL) for the long run since it is a prosperous tech business with a lot of cash on hand. Oracle Corporation (NASDAQ:ORCL) released its fiscal 2023’s first-quarter results on September 12. The business announced revenue of $11.45 billion, up 17.65% from the prior year and about $128,000 higher than Wall Street expectations.

Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm First Eagle Investment Management is a leading shareholder in Oracle Corporation (NYSE:ORCL), with 25.9 million shares worth more than $1.8 billion.

In its Q2 2022 investor letter, First Eagle Investment Management, an asset management firm, highlighted a few stocks and Oracle Corporation (NYSE:ORCL) was one of them. Here is what the fund said:

“Oracle Corporation (NYSE:ORCL) is one of the world’s largest independent enterprise software companies and has been reinventing itself for the cloud-computing environment, a transition pursued primarily through investments in organic research and design and smallish, well-priced acquisitions. That said, Oracle in June closed its largest-ever deal with the acquisition of Cerner, a designer of software to store and analyze medical records and other healthcare data.

Oracle took on additional debt to finance this all-cash acquisition and as a result plans to moderate its stock-buyback program to focus on debt reduction. Despite the weak quarter for the stock, Oracle’s operations remain strong; it reported better- than-expected results for its most recent quarter and issued upbeat guidance for the coming fiscal year.”

07. Workday, Inc. (NASDAQ:WDAY)

Number of Hedge Fund Holders as of Q2, 2022: 71

Workday, Inc. (NASDAQ:WDAY) is a California-based company that provides enterprise cloud applications in the United States and internationally. On September 14, Canaccord analyst David Hynes noted that Workday, Inc. (NASDAQ:WDAY) is the undisputed market leader among mid-market and large buyers in terms of vision, reputation, and ability to execute. Hynes reiterated his Buy rating on Workday, Inc. (NASDAQ:WDAY) shares and $200 price target.

According to Insider Monkey’s data, 71 hedge funds were bullish on Workday, Inc. (NASDAQ:WDAY) at the end of June 2022, compared to 87 funds in the previous quarter. Stephen Mandel’s Lone Pine Capital is the leading position holder in the company, with 5 million shares valued at $700.5 million.

Here is what ClearBridge Investments Sustainability Leaders Strategy has to say about Workday, Inc. (NYSE:WDAY) in its Q4 2021 investor letter:

“We believe the weakness created an opportunity for us to add to an exceptionally high-quality payments franchise with an attractive growth and free cash flow profile and little credit or interest rate exposure. It also supported our efforts to maintain diversified IT exposure in a narrowing market; additions to our software-as-aservice (SaaS) holding Workday during the quarter also bolstered this diversification, in which we seek to balance exposure to more widely owned mega cap names…”

Alongside Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Adobe Inc. (NASDAQ:ADBE), Workday, Inc. (NASDAQ:WDAY) is one of the stocks attracting the attention of institutional investors.

06. Block, Inc. (NYSE:SQ)

Number of Hedge Fund Holders as of Q2, 2022: 72

Block, Inc. (NYSE:SQ) creates tools that enable sellers to accept card payments and provide reporting, analytics, and next-day settlement. On October 12, after modifying his 2023 EPS outlook and releasing his 2024 forecasts, Baird analyst David Koning lowered his price target for Block, Inc. (NYSE:SQ) from $90 to $58 while maintaining a Neutral rating on the shares. He is increasing his 2023 EPS prediction from $1.04 to $1.20, but he believes that $1.55 is “too high” for the consensus. The analyst informs investors that he believes his own 2024 EPS estimate of $1.65 is “more realistic” than the Street’s expectation of $2.40.

Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm ARK Investment Management is a leading shareholder in Block, Inc. (NYSE:SQ), with 9.1 million shares worth more than $799 million.

In its Q2 2022 investor letter, Baron Funds, an asset management firm, highlighted a few stocks, and Block, Inc. (NYSE:SQ) was one of them. Here is what the fund said:

“Block, Inc. (NYSE:SQ) provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. Shares fell due to mixed quarterly results with more modest growth in the Seller business offsetting strength in Cash App. While integration of recently acquired Afterpay is progressing well and credit metrics remain healthy, the buy-now-pay-later business slowed due to greater competitive intensity. We continue to own the stock due to Block’s long runway for growth, sustainable competitive advantages, and unique corporate culture.”

Given this cash-generation power, we are naturally drawn to what we believe are strong and profitable financial institutions when the price is right. Presently, we believe the valuations of our financial holdings are not only reasonable, but extremely compelling, and our portfolio composition reflects this view. Representative financial holdings in the Fund includes Wells Fargo.”

Click to continue reading and see the 5 Best Software Stocks To Buy According To Hedge Funds.

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Published on October 30, 2024 at by Inan Dogan, PhD

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Published on November 16, 2024 at by Insider Monkey Staff

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