In this piece, we will take a look at the 13 best software stocks to invest in according to hedge funds. For more stocks, head on over the 5 Best Software Stocks To Invest In According To Hedge Funds.
Software is to hardware what the hand is to the glove. Both are dependent on each other for functioning, and even the smallest of chips with billions of transistors squeezed into an area of a penny are useless without the necessary software to power them up. Similarly, even the most advanced software is worthless unless there is adequate hardware power present to enable it to achieve all of its functions.
Additionally, it’s software and not the hardware that is responsible for powering some of the most important technologies today. The sharpest example of this is ChatGPT. The artificial intelligence powered chatbot that has taken the internet and the venture capital world by storm is run on NVIDIA Corporation (NASDAQ:NVDA)’s graphics processing units (GPUs).
In terms of financial value, the software industry is different from the hardware sector. While hardware companies are able to enjoy the luxury of setting high prices, they also see most of the revenue earned through these absorbed by the costs of manufacturing the products themselves. In fact, for semiconductor manufacturers such as Intel Corporation (NASDAQ:INTC) and the Taiwan Semiconductor Manufacturing Company (NYSE:TSM), a gross margin of 50% is often thought to be a commendable achievement. In layman’s terms, gross margin refers to the dollar value of sales that the company is left with after the direct costs of making its products are removed. Compare this to Microsoft Corporation (NASDAQ:MSFT)’s gross profit of $139 billion over its net sales of $204 for last year, which translates into a comfortable margin of 68%.
However, even though they are able to earn more pennies on the dollar, software companies are constrained to compete in a smaller overall revenue pie since the price of their products remains lower. For instance, take a look at a research report from The Business Research Company which analyzed the computer hardware market. The research firm attributes a $658 billion value to this sector in 2022 and expects it to grow at a compounded annual growth rate (CAGR) of 7.1% this year to sit at $705 billion. Looking further, it believes that the sector will grow at a 6.6% CAGR until 2027 to be worth $909 billion.
Another report from the same firm looks only at the operating system market to determine that it will be worth $45 billion by the end of 2023 and grow at a CAGR of 1.7% to sit at $49 billion by 2027 end. While not strictly an apples to apples comparison, especially since many computer hardware products go inside one unit of a product that uses one unit of an operating system, it still shows the vast difference between the two highly interdependent technology sectors when it comes to valuation. However, still, if we were to remove this constraint, and consider the entire software market (an assumption that bloats its value since a single computer has tons of different software running on it), then according to The Business Research Company, the software market will be worth a whopping $2.4 trillion by 2027 end after growing at a 12% CAGR from 2023 onward.
Today, we’ll look at some software companies that are hedge fund favorites, with the top picks being Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG), and Salesforce, Inc. (NYSE:CRM).
Our Methodology
We used Insider Monkey’s database of 943 hedge funds to pick out which software firms are their favorites. Out of these, the top 13 were chosen. For more software stocks, you can check out 12 High Growth Software Stocks that are Profitable.
13 Best Software Stocks To Invest In According To Hedge Funds
13. BILL Holdings, Inc. (NYSE:BILL)
Number of Hedge Fund Holders in Q4 2022: 58
BILL Holdings, Inc. (NYSE:BILL) is a business software provider headquartered in San Jose, California. The firm allows businesses to conduct their daily operations such as managing finances and payroll.
BILL Holdings, Inc. (NYSE:BILL) operates in one of the most lucrative markets in the world i.e. the small business automation segment. This enables the firm to target millions of businesses through its services in a multi trillion dollar market. 58 of the 943 hedge funds polled by Insider Monkey had bought the company’s shares in Q4 2022.
BILL Holdings, Inc. (NYSE:BILL)’s largest investor in our database is Panayotis Takis Sparaggis’ Alkeon Capital Management which owns 1.9 million shares that are worth $215 million.
Along with Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Salesforce, Inc. (NYSE:CRM), BILL Holdings, Inc. (NYSE:BILL) is another software firm that hedge funds are piling into.
12. Oracle Corporation (NYSE:ORCL)
Number of Hedge Fund Holders in Q4 2022: 65
Oracle Corporation (NYSE:ORCL) is an enterprise resource planning software provider enabling companies to manage their production, logistics, and other business functions. It is based in Austin, Texas.
Oracle Corporation (NYSE:ORCL) scored a win in February 2023 after Uber announced that it will switch to the firm’s cloud platform for its operations. Insider Monkey took a look at 943 hedge fund holdings for last year’s fourth quarter and found out that 65 had owned a stake in the firm.
Out of these, Jean-Marie Eveillard’s First Eagle Investment Management is Oracle Corporation (NYSE:ORCL)’s largest shareholder with a $1.6 billion stake that comes via 20 million shares.
11. VMware, Inc. (NYSE:VMW)
Number of Hedge Fund Holders in Q4 2022: 68
VMware, Inc. (NYSE:VMW) is an American firm headquartered in Palo Alto, California. It provides data storage, networking, modernization, and cloud management solutions.
VMware, Inc. (NYSE:VMW) is currently in the midst of a bid of being acquired by Broadcom; however, regulators across the world are wary of anti trust concerns, making the future of the deal uncertain. As of 2022’s December quarter, 68 of the 943 hedge funds surveyed by Insider Monkey had owned the firm’s shares.
VMware, Inc. (NYSE:VMW)’s largest hedge fund investor is Jim Davidson, Dave Roux, and Glenn Hutchins’s Silver Lake Partners which owns 42 million shares that are worth $5.1 billion.
10. Coupa Software Incorporated (NASDAQ:COUP)
Number of Hedge Fund Holders in Q4 2022: 69
Coupa Software Incorporated (NASDAQ:COUP) is an enterprise software provider that enables firms to manage their supply chains and keep in touch with logistics partners. It is based in San Mateo, California.
Sadly, the fourth quarter of 2022 was the final quarter in which hedge funds could publicly take a stake in Coupa Software Incorporated (NASDAQ:COUP), as the firm was bought by software investor Thoma Bravo in an $8 billion deal in February 2023. During Q4 2022, 69 of the 920 hedge funds polled by Insider Monkey had bought its shares.
Coupa Software Incorporated (NASDAQ:COUP)’s largest hedge fund investor was Dimitry Balyasny’s Balyasny Asset Management which owned 1.7 million shares that were worth $137 million.
9. Block, Inc. (NYSE:SQ)
Number of Hedge Fund Holders in Q4 2022: 70
Block, Inc. (NYSE:SQ) is a payments platform provider that allows merchants to accept payments and generate analytics. It also enables everyday users to manage their finances. The firm is headquartered in San Francisco, California.
Block, Inc. (NYSE:SQ) is currently taking aim at the cryptocurrency market, as the firm announced in March 2023 that is planning to build a bitcoin mining kit on custom made processors. Insider Monkey dug through 943 hedge fund holdings for last year’s fourth quarter and found out that 70 had held a stake in the company.
Ken Fisher’s Fisher Asset Management is Block, Inc. (NYSE:SQ)’s largest shareholder. It owns 11.3 million shares that are worth $713 million.
8. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Holders in Q4 2022: 75
Snowflake Inc. (NYSE:SNOW) is a software as a service (SaaS) cloud computing platform provider. The firm allows its customers to aggregate their data, generate insights through analytics, and communicate among themselves. It is based in Bozeman, Montana.
Snowflake Inc. (NYSE:SNOW)’s fourth quarter of the fiscal year 2023 results released in March 2023 disappointed investors as the firm posted lower than expected guidance for its current fiscal year. 75 of the 943 hedge funds had bought the firm’s shares in Q4 2022 according to an Inisder Monkey study.
Out of these, Brad Gerstner’s Altimeter Capital Management is Snowflake Inc. (NYSE:SNOW)’s largest shareholder. It owns 15 million shares that are worth $2.2 billion.
7. Workday, Inc. (NASDAQ:WDAY)
Number of Hedge Fund Holders in Q4 2022: 83
Workday, Inc. (NASDAQ:WDAY) is a cloud computing company that allows firms to manage their daily operations such as human resources management, financial operations, and supply chains. It is headquartered in Pleasanton, California.
Workday, Inc. (NASDAQ:WDAY) is another technology company facing the heat from inflation as it announced in February 2023 that it will lay off 3% of its employees. Insider Monkey’s December quarter of 2022 survey of 943 hedge funds found that 83 had bought the firm’s shares.
Workday, Inc. (NASDAQ:WDAY)’s largest investor in our database is Stephen Mandel’s Lone Pine Capital which owns 4.6 million shares that are worth $781 million.
6. Intuit Inc. (NASDAQ:INTU)
Number of Hedge Fund Holders in Q4 2022: 92
Intuit Inc. (NASDAQ:INTU) is a software company that caters to the needs of both business and public customers, allowing them to manage their daily operations and secure financing products.
Intuit Inc. (NASDAQ:INTU) is currently facing the heat from the Federal Trade Commission for advertising free tax preparation services that are only free on paper. As of 2022’s final quarter, 92 of the 943 hedge funds polled by Insider Monkey had bought the firm’s shares.
Out of these, Ken Fisher’s Fisher Asset Management is Intuit Inc. (NASDAQ:INTU)’s largest investor since it owns 2.4 million shares that are worth $939 million.
Microsoft Corporation (NASDAQ:MSFT), Intuit Inc. (NASDAQ:INTU), Alphabet Inc. (NASDAQ:GOOG), and Salesforce, Inc. (NYSE:CRM) are some software firms on the hedge fund radar.
Click to continue reading and see 5 Best Software Stocks To Invest In According To Hedge Funds.
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Disclosure: None. 13 Best Software Stocks To Invest In According To Hedge Funds is originally published on Insider Monkey.