Screen of the Week- Software
It’s tough to make the argument that software companies are cheap, given that many are trading at 10x+ next year’s sales. However, there remains a lot of growth and stability in the business models that help explain these high valuations. In this screen of the week, we’re going to talk about a few software companies we like who offer a relatively attractive entry points.
Simulations Plus (SLP)
Although SLP is expensive on a relative price to sales and growth rate metric, the company makes up for it with its long runway for growth in its clinical trial software business. Many of its software segments have no competition, and the company has a very strong FCF margins of 30%+. These highly niche software segments are complemented by a consulting business, which grows the companies relative moat with its selling along with its consultants. Overall we continue to see a long runway for double-digit growth in SLP.
Recently IPOing just this past year Pagerduty is a software company that is used to incident reports when a client’s software fails. Although the company isn’t FCF positive, they have a large cash position and revenues continue to ramp up as new customers join. The business uses a “land and expand” model that continues to help drive sales. PD is growing revenues 25%+ Y/Y, and should continue to grow revenues in the next 3-5 years at impressive double-digit clips, all while “only” trading at 11x TTM sales.
Palo Alto Networks (PANW)
PANW continues to produce enormous cash flows which it uses to grow its cloud security business with M&A. trading at less than 8x sales with revenue continuing to grow at double-digit clips for the next 5+ years, management has guided to growing sales from just below 3B to 5B by 2022. the company is a leader in firewall security, which it has been using to leverage its super high growth cloud security business. The company offers all this with a 22% FCF margin, which should continue to improve as revenues and efficiencies grow.
Splunk is so attractive over the long term thanks to its positioning as software for processing and analyzing big data. The tailwinds are huge in this business, with big data already and on track to be a massively disruptive force. On a relative basis, Splunk only trades at 11x TTM sales and continues to convert the business to its cloud offerings. the industry-wide runway for growth is huge, meaning the market is expecting a 20% 5-year CAGR in sales growth, while margins and FCF continue to ramp up.
Check out last week’s screen on restaurants.