Software stocks have caught the attention of some investors lately because some of the best software companies have been able to grow despite a difficult time for tech stocks in general. Two such companies that are on track to remain great stocks for many more years to come are Microsoft (MSFT -1.10%) and The Trade Desk (TTD -0.35%).
Both companies are investing in their futures by leaning into megatrends in their respective industries. Here's why their early leads could set these software stocks up well in the years ahead.
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1. Microsoft
Microsoft is injecting new vigor into its software apps as the company refocuses them on artificial intelligence. Over the past several months, Microsoft has said that it is infusing the ChatGPT chatbot into its Microsoft 365 suite of apps -- the leading enterprise software in the world -- to help its users become more productive and offload tasks.
Microsoft has invested heavily in ChatGPT's owner, OpenAI, spending $13 billion so far, and it's betting that the eventual returns will pay off. The company's CFO, Amy Hood, said on Microsoft's recent earnings call, "We will continue to invest in our cloud infrastructure, particularly AI-related spend, as we scale with the growing demand driven by customer transformation. And we expect the resulting revenue to grow over time."
The company is right to be optimistic about the possibilities of AI software, considering that Ark Investment Management estimates that the market could be worth $14 trillion by 2030. Microsoft is just getting started in this space, but with Word, Excel, Teams, and even its Bing search engine using the chatbot, the company is seen as a leader in the space right now.
It's also worth mentioning that Microsoft's No. 2 spot in the public cloud computing space gives the company another large opportunity to benefit. As more companies transition to cloud services in the coming years, Microsoft's strong position should help it benefit from the $463 billion (by 2028) software-as-a-service (SaaS) market.
2. The Trade Desk
The Trade Desk may not be a company you immediately think about when it comes to software stocks, but the company's ad-buying platform has been a massive success as companies look for ways to buy and sell advertisements across internet-connected devices, such as smartphones and smart TVs.
The Trade Desk's sales jumped 21% in the first quarter to $383 million, and the company swung from a loss of $15 million to net income of $9 million. The strong sales and bottom-line growth are even more impressive when you consider that much of the advertising market is slowing down right as companies try to figure out which direction the economy is headed.
Meanwhile, The Trade Desk has maintained a customer retention rate of 95% -- for nine straight years -- and continues to attract attention from large advertisers. For example, the company just added NBCUniversal to the list of companies that are implementing The Trade Desk's anonymous ad identifier, UID2, across its ad platform. UID2 is a big step away from the lack of privacy that current trackers, called cookies, have, and The Trade Desk's development of the new system has helped set itself apart as an innovative ad company.
Investors who are worried that an economic slowdown could deliver a blow to the ad industry should keep in mind that the digital ad market is still on a long-term growth trajectory. Insider Intelligence estimates that digital ad sales could reach roughly $836 billion in 2026, up from $627 billion this year.
Expect some volatility
Tech stocks have been a bit unpredictable lately, and the same may be true in the coming months as investors try to determine what's happening with inflation, interest rates, and the broader economy. But don't let some of the recent market noise keep you away from great long-term investments. These companies are setting themselves up for more growth in the coming years, and adding them to your portfolio could end up being a wise decision just a few years down the road.
