We recently compiled a list of the 12 Best Software Stocks to Buy According to Analysts. In this article, we are going to take a look at where Alight, Inc. (NYSE:ALIT) stands against the other software stocks.
Software Industry Update
According to the MCF Corporate Finance Q4 2024 software update report, software company valuations have reached unprecedented heights due to the AI boom, especially with innovations surrounding GenAI. Investors are increasingly viewing strong AI roadmaps as essential for revenue and margin expansion, leading to heightened interest in software companies that integrate advanced AI capabilities into their offerings. According to the report, software companies are trading at 6.2x the Current median EV / NTM revenue estimate.
As highlighted by the report, another key reason for increased valuations has been the high adoption rate of GenAI. The enterprise-level usage of GenAI almost doubled year-over-year in 2024 and around 65% of the enterprises now use the technology. The report noted that organizations have now transitioned from the pilot testing phase to full-scale GenAI implementations, enhancing workflows and customer experiences while unlocking new revenue streams. Moreover, the investment and funding for GenAI-based software companies also increased sharply. According to the report GenAI raised around $56 billion in funding in 2024, driven by a $10 billion round of DataBricks, a $6.6 billion round by OpenAI, and a $4 billion round of Anthropic. Not only this, GenAI also claimed more than 40% of the total AI funding across the United States, Europe, and Israel.
Talking about how AI has started to play in the favor of software, Jeff Richards, managing partner at Notable Capital appeared on a CNBC interview a month ago. He noted that AI is actively working for the software sector, indicating that the technology is not just a prospect but is already being utilized effectively in various applications within the industry. Richards highlighted that the development of AI which started with semiconductor chips, then moved to data centers and servers is now in the software development stage where software application companies are in high demand to integrate AI applications in various industries. Similar to the findings by the MCF corporate finance report, Richards also highlighted that venture capital funds have been heavily funding software startups for the past two to three years to ensure the effective application of GenAI, which we are witnessing right now.
Our Methodology
To curate the list of the 12 best software stocks to buy according to analysts, we used the Finviz stock screener and CNN. Using the screener we first aggregated a list of software stocks with analyst upside potential of more than 50%. Next, we cross-checked the analyst upside potential for each stock using CNN. Lastly, we ranked these stocks in ascending order of analysts’ upside potential. We have also added the number of hedge funds holding each stock, sourced from Insider Monkey’s third-quarter hedge funds database. Please note that the data was recorded on January 16, 2025.
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).
A person viewing their financial progress on a computer, highlighting the financial health offerings of the company.
Alight, Inc. (NYSE:ALIT)
Stock Price: $6.79
Number of Hedge Fund Holders: 40
Analyst Upside Potential: 62.00%
Alight, Inc. (NYSE:ALIT) is a leading cloud-based technology company focused on managing human resources (HR) and employee benefits. Through its Alright Worklife platform, the company provides Human Capital Management and Employee Benefits Administration services to more than 50% of Fortune 500 and around 70% of Fortune 100 companies.
Polen US Small Company Growth Strategy during its Q3 2024 investors letter decided to exit its positions from Alight, Inc. (NYSE:ALIT) stating they were not satisfied with the company’s plan and the new standalone business. However, management remains optimistic regarding the future of the company mainly on the back of improved profitability during the fiscal third quarter and new partnerships signed during the quarter.
Although the quarterly revenue decreased slightly by 0.4% year-over-year to $555 million due to lower volumes and project revenues, as well as the winding down of certain business operations. On the bright side, the gross profit margins improved from 29.8% in the previous year to 31.4% during the current year. In terms of new partnerships, Alight, Inc. (NYSE:ALIT) signed notable companies including Hewlett Packard Enterprise, Nokia, and Siemens, indicating increased revenue growth in the coming quarter.
As a result, management now expects revenue of $665 million to $685 million, indicating a $10 million increase at the midpoint versus the previous 2nd half guidance. Moreover, management also expects an adjusted EBITDA ranging from $208 million to $233 million, pointing towards optimism for continued growth despite recent challenges. Here’s what Polen U.S. Small Company Growth Strategy stated the following regarding Alight, Inc. (NYSE:ALIT) in its Q3 2024 investor letter:
“We exited four positions during the quarter, including SiTime, AppFolio, RH, Doximity, and Alight, Inc. (NYSE:ALIT). Our position in Alight, a benefits outsourcing, and business process-as-a-service company, was an unsuccessful investment. We decided to move on due to activist pressure that led to a breakup of the business. We were dissatisfied with both the plan and the new standalone business. This culminated with the CEO leaving and uncertainty over the company’s long-term strategic direction. As a result, we felt it was time to move on with better investment ideas in our pipeline.”
Overall ALIT ranks 9th on our list of the best software stocks to buy according to analysts. While we acknowledge the potential of ALIT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ALIT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article is originally published at Insider Monkey.
