The software market has long been an attractive hunting ground for potential investments. Well-known software companies like Microsoft and Adobe have provided shareholders with fantastic returns because of their fat profit margins and ability to generate billions in annual cash flow. It also doesn't hurt that the software industry has grown over the past few decades, providing a steady tailwind for these businesses. This trend is set to continue through 2030 with analysts expecting industry revenue to grow at a more than 10% rate through the end of this decade.
What are some ways investors can take advantage of this long-term growth? Here are two quality software stocks to buy for the long haul.
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1. Dropbox
Dropbox (DBX 1.53%) is a well-known file sharing, collaboration, and workflow platform. The company was started a little over a decade ago and after going public in 2018, has matured into a highly profitable software business.
The company now offers a whole suite of products to go along with its cloud storage/sharing business, including digital signatures, document analytics, security features, and remote-working tools. Steady improvement with its product suite has translated into steady growth in paying subscribers. In the first quarter, Dropbox's paying users totaled 17.1 million, up from 9.3 million in the same quarter of 2017. Along with subscriber growth, average revenue per subscriber has inched higher, hitting $134.63 last quarter compared to $110.79 five years ago.
This scaling of the business has brought fantastic operating leverage to Dropbox, and the business now generates solid amounts of cash flow. Over the last three years, trailing 12-month free cash flow is up over 100% to $723 million. At the same time, its stock price is virtually unchanged. At a market cap of $8.7 billion, shares trade at a price-to-free cash flow (P/FCF) ratio of 12, which is well below the market's average. Management is trying to take advantage of this discounted valuation by repurchasing shares. Over the last three years, Dropbox's shares outstanding are down 9%, which will help boost earnings per share over the long term.
Data by YCharts.
If paying subscribers and average revenue per paying subscriber keep ticking upwards, Dropbox stock can be a solid performer in your portfolio when bought at current prices.
2. Autodesk
You could put Autodesk (ADSK -1.15%) in the same class as Microsoft and Adobe -- it is one of the top software stocks of all time. Shares are up over 50,000% since the company's IPO in the 1980s, greatly outperforming the S&P 500 over that time span.
Early growth came from AutoCAD, Autodesk's initial product released in 1982. The product is a computer-aided design (CAD) tool that is still one of the go-to services for the architecture, engineering, and construction (AEC) industries to this day. Last year, the division generated $1.25 billion in revenue.
But Autodesk is much more than just AutoCAD today. It owns Revit, the leading 3-D design software for the architectural industry that is rapidly gaining adoption across the globe. It follows building information modeling (BIM) standards, which are also gaining adoption worldwide. However, BIM has less than 50% market share in the majority of countries, meaning this secular growth is far from over. Continued adoption of BIM, which governments are slowly mandating firms to do, should increase demand for Revit over the next decade.
Two other important growth drivers for Autodesk will come from Fusion 360 and the Autodesk Construction Cloud (ACC). Fusion 360 is a cloud-based design platform for mechanical, electrical, and manufacturing engineers. The platform is young but growing like gangbusters, hitting 198,000 subscribers last quarter. ACC is also a new division with tools for on-site construction workers that aim to connect the design of buildings (made through AutoCAD and Revit) to the actual construction process. Management says the division continues to grow quickly, albeit from a small base.
All these software products add up to strong revenue and cash generation. This fiscal year, management expects Autodesk to generate just north of $2 billion in free cash flow, and this is while experiencing steep foreign currency headwinds. Through fiscal year 2026, guidance calls for double-digit free-cash-flow growth. At a market cap of $41 billion, the stock trades at a forward P/FCF ratio of 20. This isn't crazy cheap, but given Autodesk's history of growth and expectations for the future, shareholders who hold for the long haul should do well.
