SSoftware is a necessity in our digital world. We use it in the office, for business, for entertainment and for a host of other functions. It allows me to write this article and provides the platform for the background music I listen to. There are many companies competing in this lucrative space, and they can offer above-market returns for long-term investors.
With a market cap of over $2 trillion, Microsoft (NASDAQ: MSFT) is one of the giants of the software world. We all probably interact with a Microsoft product every day. Besides its popular desktop products, Microsoft is a leader in cloud computing, cybersecurity, and gaming. In fact, the company recently announced the acquisition of ActivisionBlizzard.
The blockbuster deal, valued at nearly $69 billion, will make Microsoft the world’s third largest games company by revenue. According to management, the gaming industry has reached $200 billion and is the fastest growing form of entertainment. Activision Blizzard will bring nearly 400 million monthly active players to Microsoft.
Dramatic results were the name of the game for Microsoft. Revenue reached nearly $52 billion in the second quarter of fiscal 2022, growing 20% year-over-year. Even better, management has increased profitability in recent periods as you can see below. This is great news for shareholders, as is the continued return of capital through dividends and share buybacks. The company returned nearly $11 billion to shareholders in the second quarter alone.
Much of the gains are fueled by Microsoft Cloud, which grew sales 32% year-over-year. The global cloud computing market will grow from $445 billion in 2021 to well over $900 billion by 2026, according to research from MarketsandMarkets, giving Microsoft a long avenue for expansion.
Speaking of clouds, DigitalOcean (NYSE: DOCN) has established its own niche as a cloud service provider. While companies like Amazon, Alphabet, and Microsoft may be better for large enterprises with complex needs, DigitalOcean focuses on small and medium-sized businesses (SMBs) and individual developers. To do this, the company promotes ease of use, simple pricing, and customer support.
According to IDC, there are 100 million SMEs worldwide and 14 million new SMEs are formed each year. This provides DigitalOcean with a large and growing potential customer base. In fact, DigitalOcean reports over 600,000 customers in total. However, many of them pay less than $50 per month – the challenge for DigitalOcean will be to monetize this large user base.
The company reported revenue of $429 million in 2021, up 35%, while adjusted EBITDA rose 42% to $136 million. Even better, year-over-year revenue growth accelerated to 37% in the fourth quarter.
The company’s current market cap is around $5.7 billion and the stock has fallen 35% year-to-date, although it was up another 24% last year. More than 10% of the stock’s float is sold short, so not everyone is convinced that DigitalOcean stock will beat the market.
DigitalOcean projects a further 32% increase in sales in 2022. The company could generate well over $1 billion in annual sales by 2025 if it can sustain this pace.
ServiceNow (NYSE: NOW) the stock has grown more than 500% in the past five years. This business management software vendor has 7,400 customers worldwide, including more than 80% of the Fortune 500. In fiscal 2021, the company recorded $5.6 billion in subscription revenue, and management expects that figure to reach $7 billion in 2022, up 25%.
One of the reasons revenue continues to grow is the company’s turnover rate, which consistently exceeds 97%. The product is incredibly sticky and customers are clearly happy – a great sign for continued success.
While the stock has gained more than 55% since February 1, 2020 (just before the pandemic), the price-to-sales ratio has actually declined. For this reason, the stock can now trade at an attractive valuation for long-term investors.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Bradley Guichard owns Alphabet (C shares), Amazon, Microsoft and ServiceNow, Inc. and has the following options: Long January 2024, $100 calls on DigitalOcean Holdings, Inc. The Motley Fool owns and recommends Activision Blizzard, Alphabet (A shares ), Amazon, DigitalOcean Holdings, Inc., Microsoft and ServiceNow, Inc. The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.
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