After a brutal stretch of trading in 2022, the stock market came roaring back this year. The S&P 500 index, which is often used as a benchmark for broader market performance, has rallied 24% across 2023's trading. More importantly, it looks as if the index's impressive run could continue.
Hot trends, including artificial intelligence (AI), may help propel strong sales and earnings growth for top companies, and potential moves by the Federal Reserve to cut interest rates could help send valuations for stocks higher.
With these bullish catalysts on the horizon in mind, read on for a look at two excellent companies that could deliver fantastic returns for investors.
This beaten-down software stock could soar
Paycom Software (PAYC 1.24%) is a leading provider of human-resources and payroll-management software. The company's software helps businesses and institutions streamline operations in these categories, and its software has been hugely effective in helping organizations reduce costs and time spent and improve overall operating efficiency. In fact, the company's Beti software platform has arguably been too efficient recently.
With the third-quarter earnings report that it published in the beginning of November, Paycom noted that the company had been seeing customers cut back on some services because overall offerings on the Beti platform had made them non-essential.
Weaker-than-expected Q3 performance and forward guidance combined with news that the company's software ecosystem was suffering from internal cannibalization sent the stock plummeting. Paycom's share price is now down 34% year to date and 63% from its high. But patient investors could score big wins by taking a buy-and-hold approach with this enterprise software stock.
No doubt about it, the company's recent sales growth deceleration has been disappointing. The company's midpoint guidance calls for sales to increase roughly 11% annually in the coming year. But that's down significantly from the roughly 22% sales growth the business expects to record this year and even further from the 30% sales growth recorded in 2022.
On the other hand, Paycom is still posting very impressive margins, and it may be able to return to stronger sales growth down the line. The enterprise software specialist posted an 18.5% net income margin and an 83% gross margin in this year's third quarter.
If economic conditions improve, the total number of workers managed through the company's software ecosystem will probably increase and lead to improved sales. Paycom will also have opportunities to expand in new territories, add new services, and restructure how it monetizes its software.
PAYC PE Ratio (Forward) data by YCharts
With the stock off roughly 63% from its high and trading at 27 times this year's expected earnings, Paycom has the potential to rebound and deliver big wins over the long term.
This cybersecurity leader is built for success
While leading cybersecurity providers are using artificial intelligence to fend off threats, cybercriminals are also using AI to build and deploy attacks. CrowdStrike's (CRWD 2.03%) adaptive, AI-powered software is helping its customers fend off the rising tide of increasingly advance threads, and the company is poised to be a long-term winner in the cybersecurity space.
As the leading provider of cloud-based protection software for computers, mobile devices, servers, and other endpoint devices, CrowdStrike already has a big data advantage compared to its competitors. The significance of its ability to gather, analyze, and adapt to threat data will likely become even more pronounced as bad actors ramp up their use of generative AI and other advanced technologies to carry out attacks.
While CrowdStrike stock has seen some big swings over the past couple of years and still trades down 13% from its high, the business has continued to serve up very impressive results.
The cloud software leader's revenue jumped 35% year over year to reach $786 million in this year's third quarter. In addition to the strong sales performance in the period, CrowdStrike saw its subscription gross margin jump to 78% from 75% in the prior-year quarter.
Meanwhile, non-GAAP (adjusted) subscription gross margin for Q3 came in at 80%, up from 78% in last year's quarter. Thanks to margin expansion and impressive sales growth, the company's adjusted net income surged 107% year over year to reach $199.2 million in the third quarter.
CrowdStrike also has an excellent balance sheet. Closing out its last quarter with cash and equivalents totaling $3.2 billion and zero long-term debt, the company has plenty of flexibility when it comes to funding internal growth initiatives and pursuing potential acquisitions and partnerships that could help it branch into new service categories.
For investors looking to benefit from rising demand for cybersecurity software over the next decade and beyond, CrowdStrike stands out as a top play in the space.
