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2 Best Software Stocks to Buy in 2023 and Beyond

man sitting in front of 3 screens programming
Image source: Getty Images

Written by Stephanie Bedard-Chateauneuf, MBA at The Motley Fool Canada

Software, as Marc Andreessen memorably put it, was “eating the planet” for much of the 2010s and beyond. Yet software stocks that dominated the previous decade began to suffer from dyspepsia in 2022. As inflation and interest rates rose, investors lost interest in companies with highly valued stocks that would only be profitable in the distant future.

Having said that, many of these are still fantastic businesses with excellent margins and substantial subscription revenue. There are still plenty of software stocks available for purchase today to hold for the next decade. Here are two of the best software stocks.

Salesforce.com

Salesforce (NYSE:CRM) has been a top growth company for decades, but its stock price has dropped significantly in the last year. Salesforce shares are already down 15% from their 52-week high, and negative news seems to be surrounding the stock right now, whether it’s co-chief executive officer, or CEO (and former heir apparent to the CEO post), Brett Taylor leaving the firm, or Salesforce’s statement that it will lay off 10% of its workers.

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Nevertheless, despite the gloomy headlines, there is reason to remain optimistic. Salesforce is the type of software product that businesses are unlikely to cut, even in a downturn. Sales Cloud products boost the efficiency of sales teams and so drive revenue, making them something that firms cannot afford to cut in a downturn. “Salesforce is interwoven in the fabric of so many organisations and has become so crucial in the way they function and conduct business,” said Starboard Value CEO Jeff Smith, who recently purchased a big interest in the company.

Even Taylor’s departure has a silver lining in that it demonstrates the appeal of the co-CEO model; Salesforce can keep moving forward with founder Marc Benioff in sole command, rather than having to halt operations to recruit a new CEO who may or may not work out.

Additionally, Salesforce is cheap, with a forward price-to-earnings ratio of 26, and Salesforce is appealing in terms of price to sales, trading at just under six times sales. If Salesforce can continue to expand its revenue to $50 billion while improving margins, the company might be valued much more than it is now.

Constellation Software

Constellation Software (TSX:CSU) may not be on the radar of most investors. Because this Canadian software company trades over the counter, it is mostly covered by analysts from smaller Canadian banks.
Constellation Software, on the other hand, is a $50 billion market cap software conglomerate that I believe is worth investigating. This company has spent many years acquiring, developing, and managing vertical market software enterprises. Constellation’s industry-specific software solutions deliver mission-critical services to the public and private sectors in Canada, the United States, the United Kingdom, and Europe.

Constellation Software, founded in 1995, has become the go-to company for enterprises seeking dependable, innovative, and specialized software solutions. It attempts to keep ahead of the competition and maintain its position as an industry leader through its extensive products.

Constellation Software is a buy, according to the four most recent analyst reports. This stock’s average price objective implies a 25% increase in value over the next year.

A large part of that optimistic outlook stems from a series of acquisitions made earlier this year, notably Wide Orbit, which will be integrated with one of the company’s key divisions. Numerous spinoffs and other value-creating operations are also in the pipeline, with Constellation remaining one of the best corporations in its peer group in terms of collecting software companies while spinning out others.

If Constellation can continue to enhance its acquisitions’ return on invested capital over time, this is a growth-via-acquisition investment in the software sector that should deliver impressive compounding over the long term.

The post 2 Best Software Stocks to Buy in 2023 and Beyond appeared first on The Motley Fool Canada.

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Fool contributor Stephanie Chateauneuf has positions in Constellation Software. The Motley Fool recommends Constellation Software and Salesforce. The Motley Fool has a disclosure policy.

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