Software stocks have been one of the worst industries to own in 2022, as they have been heavily sold off due to their premium valuation levels reached in late 2021. However, despite solid execution, the valuations of these companies have dropped, making them intriguing purchases late in the year.

Two that I've got my eye on are The Trade Desk (TTD 0.30%) and CrowdStrike Holdings (CRWD -11.10%). Not only do I think these stocks make great buys now, but they are also fantastic long-term investments.

The Trade Desk

Ads are becoming much more intelligent than they used to be. Instead of broadcasting to a broad audience indiscriminately, ad companies can gather individualized data on the viewers and then cater ads to them accordingly. While some may find this creepy or annoying, others appreciate it because the user experience is completely personalized, and they may discover a new product they didn't know was available.

The Trade Desk's buy-side ad platform is powering this action, which provides advertisers with the tools they need to place ads properly. Through its software, advertisers can attach specific metrics to the campaign's performance and adjust as necessary to achieve maximum value.

When ad budgets dry up due to cost-savings measures (like what is happening now), ensuring each ad hits its mark is critical, making The Trade Desk's software extremely sticky. As a testament to its usefulness, The Trade Desk reported 95% or better customer retention in the third quarter, just like it has in the previous eight years.

Despite slow or no growth in the advertising industry, The Trade Desk's revenue increased 31% year over year in Q3 to $395 million, with fourth-quarter revenue expected to grow about 24%, according to analysts. Unlike many software companies, The Trade Desk is also profitable, posting a $16 million profit in Q3. However, it would have been even more profitable if it didn't hand out a one-time $66 million bonus to its CEO and founder Jeff Green.

When that expense disappears next year, it sets the stage for massive earnings growth.

Year Earnings Per Share Projections Change
2022 $0.24 N/A
2023 $0.54 125%
2024 $0.91 69%
2025 $1.43 57%

Data source: Nasdaq. 

That's some strong growth, but it still leaves shares valued at an expensive 83 times 2023 earnings. From a price-to-sales standpoint, The Trade Desk also trades at a fairly pricey 15 times sales. But, it's not out of the question with other software companies like Adobe or ServiceNow trading at 9 and 11 times sales, respectively.

The Trade Desk earns its premium due to its massive market opportunity and strong execution (so far). The company is doing well, and if it continues its growth, it will be an outstanding stock to own in 2023.

CrowdStrike

The need for cybersecurity software has never been greater than it is right now. But it will be even more necessary in the future due to increased digital workloads. While there are many ways to invest in this space, my favorite is with CrowdStrike. CrowdStrike's endpoint and cloud protection software utilizes every data point from all customers to upgrade its protection continuously utilizing artificial intelligence.

CrowdStrike's product line has multiple modules, each designed to perform a different aspect of cybersecurity. This gives it wide exposure to many clients but can also subject it to headline risk if one offering isn't up to par with its better ones. However, CrowdStrike was named a leader across 16 categories by G2 while gathering multiple best-in-class ratings.

This prowess has allowed CrowdStrike to rapidly grow its customer base to 21,146 as of its fiscal 2023 Q3 (ended Oct. 31). However, new customer growth is expected to slow as enterprise budgets tighten. Still, CrowdStrike grew its Q3 revenue by 53% to $581 million, with Q4 revenue expected to grow nearly 45%, per analysts.

Although CrowdStrike isn't profitable from a net income basis, it does produce solid free cash flow (FCF) of $174 million -- a 30% margin. Management believes its can maintain its 30% FCF margin next fiscal year, and with analysts guiding for $2.96 billion in sales during fiscal 2024 (ending Jan. 31, 2024), it trades at 29 times future free cash flow.

While that's not super cheap, it isn't terrible, either. Additionally, its price-to-sales ratio is in line with other software stocks at 12 times sales. CrowdStrike has an essential offering for the protection of businesses and consumers and has plenty of products for existing customers to expand into if it has difficulties onboarding new ones. CrowdStrike may be down right now, but I doubt it will stay at these levels during 2023 and beyond.