The 2022 year hasn't been kind to software stock investors. Many formerly high-flying stocks have slumped on worries of a growth slowdown ahead. Elevated valuations in late 2021 also helped set the stage for big declines this year.
But those short-term challenges are no reason to abandon a sector that's likely to see huge returns over the next decade or beyond. Businesses and consumers will be steadily shifting more work and entertainment demand online, and it makes sense for investors to stay exposed to those trends.
1. Microsoft has all the cash
Cash flow is prized in any market environment but becomes even more valuable during times of volatility like this. If it is cash that you're after, Microsoft (MSFT -0.71%) should be near the top of your list.
Yes, the software giant is seeing signs of a growth hangover hitting the business following soaring growth in 2021. Its video-game segment shrank in the most recent quarter, and demand for PC hardware and software declined in the selling period that ended in late June.
Yet Microsoft still generated a whopping $89 billion of operating cash flow in the first half of the fiscal year compared to $77 billion a year earlier. Part of that success can be attributed to its dominant position in many software-as-a-service (SaaS) niches. "We saw strong demand, took share, and increased customer commitment to our cloud platform," CFO Amy Hood told investors in July .
The company's late October earnings announcement might show further signs of slowing growth. Yet Microsoft's recent 10% dividend hike is a great sign of its financial strength and its ability to weather tough market conditions while still delivering increasing returns to shareholders.
2. Palo Alto Networks is growing
Palo Alto Networks' (PANW 0.21%) focus on cybersecurity is paying off in spades for shareholders today. The platform booked a 44% spike in fourth-quarter billings, management revealed in late August, which helped convince executives to issue a bold fiscal 2023 outlook that calls for a 25% revenue boost compared to last year's 29% spike.
It is notable that this growth is coming on top of big gains a year ago and despite pockets of weaker demand. But the better reason to like this software stock today is its financial strength.
Palo Alto Networks recently achieved profitability for the first time since 2018 thanks to rising contract values and disciplined cost control. Management is intent on protecting that newfound profitability, too.
Executives are targeting a "balance of growth and margin expansion," they said in late August. Net operating margin is projected to rise along with cash flow. In fact, annual operating cash flow is racing toward $2 billion today, reflecting solid customer engagement and a strong monetization model.
PANW Cash from Operations (TTM) data by YCharts
Wall Street isn't rewarding Palo Alto stock for these wins just yet. Shares are barely beating the market in 2022, down 15% through mid-October. But its performance gap should only improve as the company keeps gaining market share while boosting profitability. Add this stock to your watchlist, and you might be thrilled looking back in a few years that you bought it in 2022.
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