QADA - 3 Small-Cap Software Stocks to Snatch Up This Summer

The growing use of edge computing and artificial intelligence (AI), and increased IT spending to adopt these technologies to serve a bigger market efficiently, have been driving the growth of the business software and services industry. The rising utilization of cloud-based platforms has sparked demand for cloud-based software solutions and services from  small- and medium-sized businesses. Also, the increasing  use of sophisticated technologies, such as block chain, hybrid architecture and machine learning, are expected to contribute to the software industry’s growth. The software industry is expected to hit  $9.29 billion between 2021 - 2025, growing at a CAGR of almost 3%.

While the large-cap players in the software space have grown significantly, capitalizing on the industry tailwinds, and their shares are trading at lofty valuations, small- and medium-sized companies still have plenty of room to grow. In fact, the Fed's decision to hold benchmark interest rates low has been benefiting small- and medium-sized enterprises by giving them more capacity to borrow and grow their operations.

Therefore, we believe fundamentally sound small-cap software stocks Progress Software Corporation (PRGS), QAD Inc. (QADA), and Absolute Software Corporation (ABST) could be solid bets now.

Progress Software Corporation (PRGS)

Bedford, Mass.-based PRGS creates software applications. OpenEdge, Data Connectivity and Integration (DCI), and Application Development and Deployment are the three segments through which the company operates. It provides customer resource management, project management, network monitoring solution, and other web application services.

Last month, PGRS’ MOVEit file transfer won 21 honors in G2's Summer 2021 Grid Report for Managed File Transfer, including honors for  Easiest to Use, Easiest Admin, Best Usability, Highest User Adoption, Fastest Implementation, and Best ROI. These kudos should enable the company to stand out in the market and boost its brand identity.

During its second fiscal quarter,  ended May 31, 2021, PRGS’ non-GAAP revenue increased 20.7% year-over-year to $260.98 million. Its non-GAAP income from operations increased 21.5% year-over-year to $106.37 million, while its non-GAAP net income climbed 24.8% from the prior-year quarter to $79.01 million. Its non-GAAP EPS grew 26.4% from the prior-year quarter to $1.77.

A $3.49  consensus EPS estimate for the current year represents a 12.90% improvement year-over-year. Furthermore,  PRGS has an impressive earnings surprise history. It  beat the consensus EPS estimates in each of the trailing four quarters. The $534 million consensus revenue estimate  for the current year represents a 16.9% increase from the same period last year. The stock has gained 22% over the past year and 4% over the past three months.

PRGS' POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

PRGS is also rated an A grade for Quality and a B for Value and Sentiment. Within the D-rated Software-Application industry, it is ranked #7 of 130 stocks. To see additional POWR Ratings for Momentum, Growth, and Stability for PRGS, click here.

Note that PRGS is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

Click here to check out our Software Industry Report for 2021

QAD Inc. (QADA)

QADA is a manufacturer of vertically oriented enterprise software solutions for the automotive, health sciences, consumer products, food and beverage, high technology, and industrial products industries. The Santa Barbara, Calif., company also provides operational requirements, such as financials, production, demand, supply chain planning, and measurement and management of business operations.

Last month, QADA and JK Tech agreed to work together as a system integrator. JK Tech will deploy QAD Adaptive Applications' range of solutions, which includes QAD Adaptive ERP, under the conditions of the agreement. This will help QADA to expand its QAD ecosystem, further strengthening its market position.

During its  first fiscal quarter, ended April 30, 2021, QADA's total revenue increased 12% year-over-year to $82.97 million. The company’s net income was  $1.83 million, compared to a $410,000 net loss in the prior-year period. Its EPS came in at $0.09 for this quarter, compared to a $0,02 loss per share in the first quarter of 2020. The  company’s adjusted EBITDA increased 35.5% year-over-year to $6.24 million over this period.

QADA is expected to generate $6.9%  revenue growth in the  current year. Its EPS is estimated to increase 4.9% year-over-year to $1.28 in  2022. Over the past year, QADA's stock has gained 107.3%. Furthermore, it has gained 37% year-to-date.

QADA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. The stock  has an A grade for Growth and Quality, and a B for Sentiment and Stability. In the Software-Application  industry, it is ranked #6 of 130 stocks.

In total, we rate QADA on eight different levels. Beyond what we've stated above, we have also given QADA grades for Momentum and Value. Get all the QADA ratings here.

Click here to check out our Software Industry Report for 2021

Absolute Software Corporation (ABST)

ABST, which is based in Vancouver, Canada, creates, promotes, and offers a cloud-based endpoint visibility and control platform for business and public-sector companies to manage and secure computing devices, apps, and data. The company's Absolute platform provides data and device connections, visibility, and operating system controls.

This month, ABST announced that it has completed its purchase of 100% of NetMotion Software, a premier supplier of connectivity and security solutions, from The Carlyle Group. The acquisition should  help ABST expand its product portfolio and strengthen its competitive position in the market.

During its fiscal third quarter, ended March 31, 2021, ABST’s revenue increased 17.6% year-over-year to $30.65 million, while its operating income grew 1.6% year-over-year to $3.23 million. The company’s gross margin increased 18% year-over-year to $26.76 million. Its adjusted EBITDA surged 27% from the prior-year quarter to $7.7 million, while cash from operating activities increased 95% year-over-year to $7.3 million over this period.

Analysts expect ABST's revenue to increase 14.5% year-over-year to $119.81 million in the current year. ABST's stock has gained 40.7% over the past year. Also, the stock has surged 21.2% year-to-date.

It is no surprise that ABST has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Quality, and a B for Value and Sentiment. In the Software-Application , it is ranked #12 of 130 stocks.

In addition to the POWR Ratings grades we have just highlighted, one  can see  ABST’s ratings for Growth, Stability, and Momentum here.

Click here to check out our Software Industry Report for 2021

PRGS shares were trading at $47.35 per share on Friday morning, up $0.51 (+1.09%). Year-to-date, PRGS has gained 5.60%, versus a 16.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

More...