In this article, we will look at the 7 Cheap Software Stocks to Invest In.
Avoiding Hype and Focusing on Downstream Opportunities
Billionaire investor David Tepper, Founder and President of Appaloosa Management, recently shared his thoughts on the market and investment strategies in a conversation on CNBC on September 26. Tepper began by discussing his views on tech stocks, specifically mentioning Meta and Google, which he owns, and Nvidia, which he had previously sold due to concerns about its high valuation.
Tepper also touched on energy, particularly the growing demand for power to support the development of new technologies such as artificial intelligence (AI). He emphasized the importance of natural gas in meeting this demand, stating that it is necessary for powering AI’s growth. Tepper expressed skepticism about the feasibility of relying solely on renewable energy sources, citing the need for a more practical and realistic approach to meeting the country’s energy needs. He also mentioned that he has spoken to governors from both sides of the aisle and believes that a collective effort is needed to address the country’s energy requirements.
When asked about the upcoming election, Tepper stated that he is a proponent of a split government, believing that it is beneficial for the economy and the markets. He expressed concern about the potential for a sweep by either party, citing the risks of populist and progressive policies that could lead to giveaways and increased government spending. Tepper emphasized that his views are purely from a market perspective and that he does not want to see either party dominate the government. He believes that a split government will prevent either party from implementing extreme policies, which would be beneficial for the markets.
Regarding AI, Tepper acknowledged that it is a rapidly growing field but expressed caution about investing directly in AI companies. Instead, he prefers to invest in downstream companies that will benefit from the growth of AI. Tepper also mentioned that he is impressed by the potential of AI to drive growth and innovation, but is uncertain about the long-term prospects of certain companies, which are heavily reliant on AI.
In terms of his investment strategy, Tepper emphasized the importance of being cautious and not getting caught up in the hype surrounding certain stocks or trends. He noted that he has been successful in the past by being contrarian and taking a more nuanced approach to investing. Tepper also mentioned that he is not afraid to take a step back and re-evaluate his investment decisions, citing the importance of being adaptable in a rapidly changing market environment.
David Tepper’s insights on the market and investment strategies offer a valuable perspective on the current state of the economy and the tech industry. His emphasis on being cautious and adaptable in a rapidly changing market environment is a timely reminder for investors to remain vigilant and avoid getting caught up in the hype surrounding certain stocks or trends. With that in context, let’s take a look at the 7 cheap software stocks to invest in.
A software developer typing on a laptop in a modern office environment.
Our Methodology
To compile our list of the 7 cheap software stocks to invest in, we used Finviz and Yahoo stock screeners to find the 30 largest software companies with a PE ratio of less than 20. From that list, we narrowed our choices to the 7 stocks that analysts see the most upside to. The list is sorted in ascending order of analysts’ average upside potential, as of October 3. We also added the hedge fund sentiment around each stock, which was taken from our database of 912 elite hedge funds, as of Q2 of 2024. The list is sorted in ascending order of their average upside potential.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Cheap Software Stocks to Invest In
7. NICE (NASDAQ:NICE)
Forward P/E Ratio as of October 3: 15.48
Upside Potential: 46.35%
Number of Hedge Fund Holders: 29
NICE (NASDAQ:NICE) is a leading CCaaS (Contact Center as a Service) and provides software solutions for enterprise organizations that focses on customer engagement, financial crime prevention, and AI-driven analytics. The company’s application software is widely adopted across various industries and is recognized for its leadership in AI-powered analytics solutions.
NICE (NASDAQ:NICE) has adopted and recognized the requirement for its enterprise solutions to digitalize, be cloud-based, and, more recently, use artificial intelligence. Its SaaS (software-as-a-service) model and its comprehensive lineup of CX solutions ensure recurring and increasing revenues from existing customers. NICE’s (NASDAQ:NICE) integrated solutions and its full range of products give it a competitive advantage. The company’s CXone, a CCaaS, helps with customer interactions, from AI chatbots to voice conversations. NICE (NASDAQ:NICE) also offers cloud-based financial crime and compliance solutions through its X-Sight platform.
The company has grown its customer base, patents, and products organically and through multiple bolt-on acquisitions. NICE (NASDAQ:NICE) acquired LiveVox in December 2023 for $424 million. For FY24, LiveVox is expected to contribute $142 million in revenues. NICE (NASDAQ:NICE) has also made several smaller acquisitions for a total sum of $184 million in 2021 and 2022, and Mattersight, a cloud-based analytics for customer service organizations, was acquired for $105 million in 2018.
NICE’s (NASDAQ:NICE) financial performance has been impressive, with revenue growth of over 10% and earnings growth higher than sector averages. Operating margins have improved from 28.7% to 29.6% in FY23, and non-GAAP EPS was $8.79, 15% higher compared to last year.
NICE (NASDAQ:NICE) is a compelling investment with a strong financial profile, high growth potential, and a discounted valuation. The company’s comprehensive CX platform, cloud-based solutions, and AI innovations drive market share gains and long-term growth potential.
6. LiveRamp (NYSE:RAMP)
Forward P/E Ratio as of October 3: 14.98
Upside Potential: 47.14%
Number of Hedge Fund Holders:
LiveRamp (NYSE:RAMP) is a data collaboration platform that allows companies to develop and use data in a secure way to change the overall customer experience and generate opportunities for effective business growth. LiveRamp’s (NYSE:RAMP) software is essential for marketers looking to optimize their digital advertising strategies in a privacy-focused way.
LiveRamp (NYSE:RAMP) has opportunities for growth through the development of its data collaboration platform and strategic partnerships. The company plans to integrate and scale Habu’s Clean Room technology, a technology to allows users to collaborate on data without moving or copying it, and has exhibited favorable customer feedback and a growing sales pipeline.
LiveRamp (NYSE:RAMP) also partners with Google’s DSP, Display & Video 360, which enables advertisers and publishers to align their first-party data for personalized advertising securely. However, LiveRamp (NYSE:RAMP) also faces challenges, including the delay of Google’s launch of a change in third-party cookies to early 2025. The company is also upgrading its products and demonstrating customer loyalty in a competitive environment.
LiveRamp’s (NYSE:RAMP) gross margin has remained relatively stable at around 72-74% throughout the year, reflecting efficient cost management despite fluctuating revenue costs. The company is well-positioned to leverage the growing requirement for secure first-party data collaboration and addressable digital advertising.
LiveRamp’s (NYSE:RAMP) ability to execute its growth strategy and improve its profitability makes it an attractive investment opportunity.
5. DoubleVerify (NYSE:DV)
Forward P/E Ratio as of October 3: 19.46
Upside Potential: 47.73%
Number of Hedge Fund Holders: 20
DoubleVerify (NYSE:DV) specializes in digital media measurement and analytics software. The company ensures that ads are delivered in brand-safe environments, are viewable, and are free from fraud. DoubleVerify’s (NYSE:DV) services are highly sought after by advertisers and media platforms looking to optimize their ad spend and ensure transparency in digital advertising.
On September 6, DoubleVerify announced the rollout of its Inflammatory Politics and News (IPN) category on Meta. This expansion enables advertisers to independently authenticate campaign quality against controversial news and political topics, allowing them to choose the level of protection that best fits their brand requirements. The IPN category is based on a clearly defined policy that sets out which types of content should be classified accordingly, such as the communication of unreliable or unsubstantiated information on issues of societal importance.
This category release is powered by DoubleVerify’s (NYSE:DV) Universal Content Intelligence division and is particularly timely, given the upcoming election year and the surge in challenging political topics. By leveraging DoubleVerify’s new AI-powered category, advertisers can protect their brand equity and evaluate the suitability of Meta based on their specific marketing objectives.
DoubleVerify (NYSE:DV) recently partnered with Hakuhodo DY Media Partners, a leading Japanese advertising agency, to deliver results for advertisers while ensuring brand safety and quality. By integrating DoubleVerify’s (NYSE:DV) AI-driven technology with Hakuhodo’s Advertising as a Service (AaaS) model, the companies aim to offer a powerful solution that ensures improved ad quality through AI technology and enables advertisers to deliver ads effectively and securely by optimizing advertising effectiveness and minimizing the risk of brand damage.
4. Five9 (NASDAQ:FIVN)
Forward P/E Ratio as of October 3: 12.43
Upside Potential: 61.57%
Number of Hedge Fund Holders: 34
Five9 (NASDAQ:FIVN) provides cloud contact center software for businesses looking to enhance customer engagement. The platform enables seamless communication through various channels, including phone, email, and social media.
Five9 (NASDAQ:FIVN) focuses on improving customer experience through automation and AI. The company’s AI and automation offerings are expected to play a significant role in its future growth and profitability. Management noted that these offerings have higher gross margins than its traditional contact center software, and they are expected to contribute to the company’s revenue growth in the future. Five9’s (NASDAQ:FIVN) ability to offer a comprehensive suite of contact center software solutions, including AI and automation, is a key differentiator in the market and is expected to drive its growth and profitability. Five9 (NASDAQ:FIVN) recently announced a major client win, which is expected to contribute $50 million in annual recurring revenue (ARR) for the next few years.
Additionally, in Q1, Five9’s (NASDAQ:FIVN) earnings report showed an EBITDA margin of 15.2%, which was 110 basis points above the consensus estimate. This margin expansion is a positive sign for the company’s profitability, and it is expected to continue to improve in the future. The company aims to achieve an EBITDA margin of 23% or higher by 2027 and has multiple levers to achieve this goal, including economies of scale, an increase in subscription revenue, and the growth of its AI and automation offerings. Brown Capital Management stated the following regarding Five9. (NASDAQ:FIVN) in their Q2 investor letter:
“Five9, Inc. (NASDAQ:FIVN) is a leader in cloud-based contact center software, which serves as the routing engine to connect callers to agents. With the growth of e-commerce, consumers are making fewer in-person visits to stores but contacting companies more frequently, driving the need for world-class contact-center software solutions like Five9’s. It has been a tough couple of years for Five9’s stock, and this quarter provided no relief. Competitive concerns, questions about AI’s long-term impact on the business, and deteriorating macroeconomic conditions have all cast clouds over the company’s stock. Five9’s consumer segment, one of its largest divisions, has really struggled of late as clients hire fewer call center agents, pressuring Five9’s seat-based revenue model. Total revenue growth decelerated to 13% year-over-year in the most recent quarter, down from 28% and 17% in 2022 and 2023, respectively. Moreover, management guided to 16% for the full year 2024, which some consider optimistic given the weak start to the year. These worsening sales trends further weighed on shares during the quarter.
Looking through the current industry doldrums, we see a bright future for Five9. The company inked its largest deal ever during the quarter, which will generate more than $50 million in annual revenue once fully rolled out. We believe this is an important signal of Five9’s long-term potential. The company is attacking a $60 billion market opportunity, is winning new business at industry-leading rates, and is gaining share from legacy incumbents stuck with antiquated technology. We continue to assess the potential threat of AI, but so far, it has provided an uplift to company results. The company’s AI product is very popular with large enterprises as it assists agents with customer interactions and can sometimes be used to fully automate interactions. Far from shrinking the number of industry seats, as some fear, management said revenue per seat doubles when customers adopt their AI applications. We expect sales growth to pick up markedly in the coming years, which should result in much stronger stock performance.”
Five9 (NASDAQ:FIVN) strong growth prospects demonstrate its ability to grow as more businesses adopt cloud-based communication solutions.
3. PagSeguro Digital (NYSE:PAGS)
Forward P/E Ratio as of October 3: 6.68
Upside Potential: 61.87%
Number of Hedge Fund Holders: 32
PagSeguro Digital (NYSE:PAGS) is a Brazilian payment processing company that offers digital payment solutions for businesses and consumers. The company offers mobile payments and point-of-sale devices.
PagSeguro Digital (NYSE:PAGS) has seen rapid growth as e-commerce and digital payments continue to rise in Brazil. The company’s revenue and earnings growth have been strong, but the stock price has been under pressure due to high interest rates in Brazil.
The company has significantly increased its FY2024 Total Payment Volume (TPV) guidance, driven by strong demand for its merchant services and a focus on medium and large enterprises. Despite the high-interest rate environment in Brazil, PagSeguro Digital’s (NYSE:PAGS) financial income growth has outpaced its expenses, and the company’s net income margin is expected to recover.
PagSeguro Digital’s (NYSE:PAGS) stock is trading at a significant discount relative to the broader sector. Its forward PE is 6.68, a 43.36% discount to its sector median of 11.79. Analysts expect the company to grow its earnings by 14.84% this year and have a consensus on the stock’s Buy rating, setting an average share price target at $16.19, which represents a 61.87% upside potential from its current level.
As of the second quarter, the stock is held by 32 hedge funds, and the stakes amount to $424.82 million. According to Insider Monkey’s hedge fund database, Point72 Asset Management is the largest shareholder in the company and has a stake worth $127.70 million as of June 30.
2. GigaCloud Technology (NASDAQ:GCT)
Forward P/E Ratio as of October 3: 9.08
Upside Potential: 64.38%
Number of Hedge Fund Holders: 5
GigaCloud Technology (NASDAQ:GCT) runs Giga B2B, a business-to-business (B2B) e-commerce platform specializing in the logistics and distribution of large parcel merchandise, such as furniture, exercise equipment, and home appliances. The company connects global buyers with manufacturers in international markets.
The global B2B e-commerce market is expected to grow by 22.5% CAGR between 2023-2030. Digital channels are expected to contribute 56% of revenue by 2025. This increases the potential market and customer base for B2B e-commerce platforms such as Giga B2B.
In Q2, GigaCloud Technology (NASDAQ:GCT) reported a revenue of $310.87 million, a 103% increase compared to the previous year. However, the company’s earnings per share (EPS) growth has been slower, which has led to a decline in the stock price. Despite this, the company’s management believes the stock is attractively valued and has announced a $46 million share buyback program. The company is expected to increase its revenue by 58% YoY in Q3.
GigaCloud Technology’s (NASDAQ:GCT) stock is trading at a forward PE of 9.08, a 61% discount to its sector median of 17.06. Analysts expect the company to increase its earnings by 20.11% this year and have a consensus on the stock’s Buy rating, setting an average share price target at $51.37, which represents a 64.38% upside potential from its current level.
As of the second quarter, the stock is held by 5 hedge funds, and the stakes amount to $14.68 million.
1. TELUS Digital (NYSE:TIXT)
Forward P/E Ratio as of October 3: 8.59
Upside Potential: 87.72%
Number of Hedge Fund Holders: 9
TELUS Digital (NYSE:TIXT), formerly known as TELUS International, provides digital customer experience and IT services, including software infrastructure solutions. The company helps businesses manage customer interactions and optimize their digital transformations. TELUS International (NYSE:TIXT) has expanded its service offerings across multiple sectors, including healthcare, finance, and e-commerce.
TELUS Digital (NYSE:TIXT) recently launched a new product called Fuel EX, an enterprise-safe generative AI (GenAI) employee assistant designed to support productivity, creativity, and research. Fuel EX provides a single point of entry for employees to access a GenAI interface, where they can select from over 20 large language models (LLM) from various vendors to help them with everyday tasks such as knowledge searches, summarization, copywriting, image generation, and code writing.
According to the 2024 Work Trend Index Annual Report from Microsoft and LinkedIn, three out of four global knowledge workers are using AI for work, and of those users, 78% are bringing their own AI tools to work, creating a major security concern for companies. Fuel EX enables companies to trust that all data inputted and produced will be kept secure, maintaining the integrity of sensitive company information.
TELUS Digital (NYSE:TIXT) is struggling with a challenging macroeconomic environment and industry competition. However, the company is focusing on bundling its services to drive revenue growth and profitability, with an emphasis on offering premium bundled offers across mobility and fixed services to increase Average Margin Per User (AMPU).
Additionally, TELUS Digital (NYSE:TIXT) is investing in product development and differentiation to stay ahead of the competition, launching new products and services such as its device-agnostic smart home platform. The company is also prioritizing cross-selling and increasing multi-product penetration to drive revenue growth, leveraging its data and AI capabilities to increase product intensity and drive revenue.
Furthermore, TELUS Digital (NYSE:TIXT) is undergoing digital transformation to improve its cost to serve and drive revenue growth, leveraging digital capabilities to improve customer experience and drive efficiency. The company is also investing in 5G and IoT to drive revenue growth, with a focus on the B2B, where it sees strong momentum. TELUS Digital (NYSE:TIXT) has also made strategic acquisitions, such as the acquisition of LifeWorks, to drive revenue growth and increase its presence in the healthcare and wellness space. Moreover, the company is forming partnerships and collaborations, such as its partnership with AWS, to drive revenue growth and improve its offerings.
Overall, TELUS Digital (NYSE:TIXT) is a high-risk, high-reward investment. The company’s ability to turn around its business and deliver on its growth story will be crucial to its success.
While we acknowledge the potential of TELUS Digital (NYSE:TIXT) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TIXT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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