In 2011, legendary investor and software engineer Marc Andreessen famously said that "software is eating the world," meaning that software would upend entire industries and disrupt incumbent stocks. Over the next decade, his vision played out, and software and tech companies came to dominate the broader market. In 2022, some of the air came out of this sector as rising inflation and recession fears made many investors less willing to pay high multiples for the future cash flows of these companies.
But software is still eating the world -- now just at a more palatable valuation. Here are two dominant software companies you can buy now for 2022 and beyond. Each is trading at significant discounts to 52-week highs, but these industry mainstays look poised to keep growing for years to come.
Image source: Getty Images.
1. Adobe
At a valuation of nearly $200 billion, Adobe (ADBE -0.78%) is indeed a company that is eating its fair share of the world. Over the last 10 years, this software juggernaut has given shareholders a return of over 1,160%. This return would be higher if not for a 24% stock price decline this year, which creates an opportunity to buy shares at a discount.
Many of Adobe's products, such as Acrobat, Illustrator, and Photoshop, have become ubiquitous, and many people interact with them on a daily basis. These products are part of the Creative Cloud subscription within Adobe's Digital Media segment. Adobe also has a Digital Experience business centered around digital marketing, which offers services like analytics on audience, content management, and digital commerce tools.
Shares of Adobe are down markedly year to date because the company has been lumped in with other tech companies hit by a faltering economy. But make no mistake, Adobe is not one of those companies that reached a frivolous valuation while barely churning a profit. Adobe made nearly $5 billion in profits last year. Adobe boasts an enviable gross margin of 87.5%, which is among the best in the entire software industry (which is quite a feat, because this industry is full of companies that maintain strong gross margins). These stellar gross margins show that Adobe is a dominant software company that provides solutions that customers value highly, giving Adobe pricing power and making it a great long-term addition to any portfolio.
2. ServiceNow
Speaking of dominant software companies, ServiceNow (NOW -4.03%) is another great choice. Shares of ServiceNow have followed a very similar pattern to Adobe and are down an almost identical 25% year to date, but the business itself is thriving. Like Adobe, ServiceNow has rewarded its shareholders with incredible returns over the last decade, with a 10-year gain of over 1,600%.
ServiceNow is using the cloud to help companies streamline and optimize their workflows. This makes them more efficient and helps them cut costs -- even in a recessionary environment where software budgets fall, this is a service that companies will still need, and may become even more important. ServiceNow generates impressive gross margins of 77.5% and retains the overwhelming majority of its customers -- during the second quarter of 2022, ServiceNow reported a 99% renewal rate. During this quarter, which was right in the middle of a difficult operating environment with a lot of economic uncertainty, ServiceNow grew revenue by 29.5% on a constant currency basis and also upped its customer count by 22%. The company counts about 80% of the biggest U.S. companies as its customers, indicating how entrenched it is becoming with large enterprises.
With these strong gross margins and importance to its large and lucrative enterprise customers, ServiceNow looks like a compelling software stock to add to investor portfolios.
Volatility creates attractive entry points
Looking ahead, 2022's market conditions have rocked the boat for software stocks, but over the long run, this looks like it has simply created some attractive entry points to invest in some of the industry's power players.
