The hype cycle in software has gone from boom to bust over the past few years as a pandemic-fueled surge gave way to last year's collapse and sky-high valuations came back down to earth.
However, smart investors know that the best opportunities to buy stocks often come on weakness, which could mean that now is an excellent time to buy software stocks. On that note, keep reading to see two software stocks that look like smart buys today.
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1. Snowflake
Snowflake (SNOW 2.53%) made a splash on the public market with its IPO in 2020. The stock surged out of the gate and rode the tech boom for the first year of its publicly traded history, but it has since come crashing down.
However, the company is still putting up strong growth, outpacing nearly every other software company on the market.
Revenue jumped 67% to $522.8 million with remaining performance obligations, or backlog, up 66% to $3 billion, showing its rapid growth should continue into the future.
Snowflake's focus is on data warehousing. It operates through a data cloud that allows its customers to store all of its data in one place where it can be accessed and analyzed. Snowflake integrates with data analytics software companies like Alteryx and Amplitude and has become a go-to cloud partner in a data-driven business world.
The company now has 287 customers with more than $1 million in annual revenue and more than 7,000 total competitors. Snowflake has a wide range of competitors, including the cloud infrastructure giants like Microsoft Azure and Amazon Web Services and software-as-a-service provider MongoDB Atlas. However, Snowflake's pure-play focus on data warehousing gives it an advantage over its rivals, and it seems to have more capabilities than its competitors.
One reviewer on Gartner wrote: "Through our tests, Snowflake has proven to be superior to other high-end competitors in terms of its ability to handle multiple users at once. Very little time is needed for Snowflake to get up and running." Snowflake's growth rate speaks for itself, showing the company is outgrowing the competition and penetrating a massive market.
The stock is still expensive at a price-to-sales ratio of 28, but its growth rates should bring that ratio down rapidly, and the company has started to report non-GAAP profits. With a massive addressable market in front of it, Snowflake still has a lot of growth potential.
2. Shopify
Another longtime hypergrowth stock is Shopify (SHOP -2.37%), though the Canada-based e-commerce software company has slowed over the past year as it faces difficult comparisons with the pandemic boom and broader macroeconomic headwinds that have affected most e-commerce stocks.
The company reported solid results in the fourth quarter, with revenue up 26%, or 28% in constant currency, to $1.7 billion. Gross merchandise volume rose 13%, or 17% in constant currency, to $61 billion, showing the company improved its take rate thanks to an increase in customer usage for Shopify Payments and Deliverr.
Shopify shares actually fell in the report as the company's guidance disappointed with a forecast of high-teens revenue growth in the first quarter, but there are a few reasons to believe that Shopify still looks well positioned to thrive over the long term.
The company just announced its first price increase in 12 years, which should help improve the bottom line and give the company more income to reinvest in the business. Shopify also seems to be resisting the threat from Amazon's Buy with Prime as Amazon's own guidance called for modest revenue growth in the first quarter of just 4%-8%, and there's little anecdotal evidence that Buy With Prime is making a dent with Shopify sellers.
There's still a large market to penetrate in e-commerce, and Shopify's growth should reaccelerate once the macroeconomic environment improves.
