In this article, I evaluated two software stocks, Robinhood Markets, Inc. (HOOD) and MarketWise, Inc. (MKTW), to determine which has the potential for better returns. We believe MKTW is the better investment for reasons explained throughout this piece.

The software industry empowers individuals, organizations, and governments with tools for communication, automation, and information access, boosting economic growth. It fuels innovation in healthcare, retail, education, manufacturing, and multiple other sectors, improving lives worldwide. The software industry generates nearly $1.4 trillion in annual contributions to the U.S. economy.

The global business software and services market is projected to reach $1.15 trillion by 2030, growing at a CAGR of 11.9% during the forecast period (2023-2030). Meanwhile, the U.S. business software and services market is expected to grow at a CAGR of 10.7% from 2023 to 2030.

The demand for enterprise software and services is expected to be driven by the rapid increase in the volume of enterprise data and the growing automation of business processes across end-use industries. Increased deployment of software solutions across IT infrastructure to facilitate improved decision-making, enhanced profitability, and inventory cost reduction will also benefit the market.

Furthermore, the software industry’s prospects look bright due to the rising adoption of innovative technologies such as AI, machine learning, cloud computing, IoT, blockchain, AR&VR, and metaverse. According to Gartner digital markets’ 2023 SMB tech trends survey, approximately 90% of businesses view technology as a critical aspect for achieving organizations' goals.

Moreover, more than two-thirds of businesses plan to increase their investment in technology and software this year to drive efficiencies and cost savings.

Gartner forecasts software spending to grow 13.7% year-over-year to  $922.75 billion in 2023. This double-digit growth is primarily due to the growing demand for cloud-based software and digital business transformations worldwide. Further, the software segment is expected to increase another 14.1% to top $1.05 trillion in 2024.

Therefore, software stocks HOOD and MKTW will likely benefit from the industry’s solid growth prospects.

HOOD has declined 14.3% over the past month, while MKTW plunged 3.8%. HOOD has slumped 8.7% over the past nine months, compared to MKTW’s 8.9% gain. However, HOOD surged 10.2% year-to-date, while MKTW fell 2.1%.

But here are the reasons why we think MKTW could perform better in the near term:

Latest Developments

On August 8, HOOD announced being investigated for its trading execution, the latest in a string of regulatory and legal proceedings faced by the online brokerage.

“The New York Attorney General is conducting an investigation into brokerage execution quality. We are cooperating with this investigation,” HOOD said in a recent filing.

On June 9, HOOD removed three crypto tokens, including Cardano, Polygon, and Solana, from its trading platform. In a Twitter thread, HOOD cited the SEC’s actions as reasons for the delisting, saying the Coinbase and Binance lawsuits “introduced a cloud of uncertainty” around the tokens.

On October 18, MKTW announced a regular dividend to shareholders of Class A common stock of $0.01 per share. A comparable distribution of $0.01 per unit has also been approved for holders of MarketWise, LLC units. The dividend and distribution, totaling approximately $2.9 million in aggregate, will be paid on January 25, 2024, to shareholders and unitholders as of December 25, 2023.

Given the strong balance sheet and after a capital allocation review, MKTW also announced a special dividend to shareholders of Class A common stock of $0.15 per share. In addition, a comparable distribution of $0.15 per unit has been approved. The dividend and distribution, with nearly $50 million in aggregate, will be paid on December 1, 2023.

Recent Financial Results

For the second quarter that ended June 30, 2023, HOOD’s net revenues increased 52.8% year-over-year to $486 million. However, the company’s transaction-based revenues decreased 4.7% year-over-year to $202 million. Its monthly active users (MAU) dropped to 10.8 million, one million fewer than the prior quarter and 3.2 million less than a year ago.

In addition, as of June 30, 2023, the company’s cash and cash equivalents were $5.83 billion versus $6.34 billion as of December 31, 2022. Also, its current liabilities increased to $21.36 billion, compared to $16.25 billion as of December 31, 2022.

MKTW reported a net revenue of $103.60 million in the second quarter that ended June 30, 2023. Its adjusted cash flow from operations (CFFO) was $29 million, compared to $26.80 million in the same quarter of 2022. The company’s total subscribers were $16.70 million, compared to $15.87 million in the previous year’s quarter.

Furthermore, MKTW’s cash and cash equivalents stood at $187.02 million as of June 30, 2023, compared to $158.58 million as of December 31, 2022. The company’s current liabilities were reduced to $354.62 million versus $385.51 as of December 31, 2022.

Expected Financial Performance

Analysts expect HOOD’s revenue for the third quarter (ended September 2023) to increase 34.7% year-over-year to $478.41 million. However, the company is expected to report a loss per share of $0.08. Further, HOOD’s loss per share for the current year (ending December 2023) is estimated to be $0.62.

For the fiscal year ending December 2023, MKTW’s EPS is expected to increase 70.1% year-over-year to $0.10. Likewise, analysts expect the company’s EPS and revenue for the fiscal year 2024 to grow 133.5% and 10.2% from the prior year to $0.22 and $491.98 million, respectively.

Profitability

HOOD’s trailing-12-month revenue is 3.5 times what MKTW generates. However, MKTW is more profitable, with a trailing-12-month gross profit margin of 87.58% compared to HOOD’s 77.82%. MKTW’s trailing-12-month net income margin of 0.37% favorably compared to HOOD’s negative 49.58%.

Additionally, MKTW’s trailing-12-month Return on Assets (ROA) of 21.82% compared with HOOD’s negative 0.62%.

Valuation

In terms of non-GAAP P/E (FY2), MKTW is currently trading at 10.97x, 33.6% lower than HOOD, which is trading at 16.52x. In addition, MKTW’s trailing-12-month Price/Sales and Price/Cash Flow multiples of 0.10 and 1.16 are lower than HOOD’s 4.80 and 6.98, respectively.

Thus, MKTW is relatively more affordable.

POWR Ratings

HOOD has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, MKTW has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. HOOD has a D grade for Value, in sync with higher-than-industry valuation. The stock’s forward non-GAAP P/E and Price/Sales of 22.08x and 7.36x are significantly higher than respective industry averages of 8.67x and 1.15x.

On the other hand, MKTW has an A grade for Value, consistent with its lower valuation relative to its peers. The stock’s forward Price/Sales of 0.14x is 93.6% lower than the industry’s average of 2.19x.

In addition, HOOD has a D grade for Quality, in syn with lower profitability compared to its peers. The stock’s trailing-12-month ROTA of negative 2.89% compared to the industry average of 1.15%.

On the contrary, MKTW has a B grade for Quality, justified by its higher-than-industry profitability. The stock’s trailing-12-month gross profit margin of 87.58% is 46.5% higher than the 59.79% industry average.

Of the 134 stocks in the Software - Application industry, HOOD is ranked #127, while MKTW is ranked #13.

Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Sentiment, and Growth. Click here to view HOOD Ratings. Get all MKTW ratings here.

The Winner

Demand for software products and services is expected to grow considerably, driven by rapid digitalization globally and the growing usage of innovative technologies like AI, IoT, and more, creating ample growth opportunities for software companies. Given the industry’s bright prospects, software stocks HOOD and MKTW are poised to grow considerably.

However, HOOD’s relatively poor financials, elevated valuation, low profitability, and bleak near-term outlook make its competitor, MKTW, the better software stock pick.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software - Application industry here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

HOOD shares were unchanged in premarket trading Friday. Year-to-date, HOOD has gained 10.20%, versus a 12.74% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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