The world's growing dependence on technology and digital solutions is a continuous trend. The sustained demand for software solutions in diverse sectors such as business, healthcare, and entertainment suggests a highly promising trajectory for the industry's progress.
Given the solid backdrop, in this piece, I have assessed the fundamentals of two software companies, Robinhood Markets, Inc. (HOOD) and MarketWise, Inc. (MKTW), to determine which one could be a better addition to your portfolio this month.
The market for software applications is dynamic and diverse, comprising a wide range of tools and platforms designed to simplify the process of creating, testing, and deploying applications across different computing environments such as desktop, web, and mobile platforms.
Furthermore, the escalating popularity of smartphones, tablets, and widespread internet connectivity has sparked a substantial increase in the demand for mobile and online applications. These applications have become indispensable for both corporate and consumer needs.
As the demand for digital solutions continues to rise across various industries, this market is witnessing significant growth. The anticipated size of the global software market is projected to hit a staggering $1.79 trillion by 2032, exhibiting an impressive CAGR of 11.7% during the forecast period from 2023 to 2032.
Meanwhile, Gartner predicts a double-digit growth in the software segment in 2024, primarily propelled by increased investment in cloud technologies. As per the forecast, in 2023, global software spending is projected to achieve a year-on-year growth of 12.9%, reaching a sum of $916.24 billion. Additionally, the outlook for 2024 indicates a surge in global software spending to $1.04 trillion, showcasing a 13.8% year-on-year rise.
Considering the industry’s favorable outlook, HOOD and MKTW should benefit. However, MKTW appears to have outshined HOOD in terms of price performance by surging 72.3% over the past three months compared to HOOD’s 13.8% gain during the same period.
Likewise, MKTW’s shares gained 55.4% over the past nine months, while HOOD gained 34.5% in the same period. Moreover, MKTW’s shares soared 79.5% year-to-date to close the last trading session at $2.83. In contrast, HOOD’s shares gained 48.5% year-to-date to close the last trading session at $12.09.
However, to find out which Software - Application stock is the better pick, let us dig deeper into the fundamentals of the featured stocks.
Recent Financial Results
HOOD’s total net revenues for the fiscal third quarter (ended September 30, 2023) amounted to $467 million, while its net loss came in at $85 million and $0.09 per share, respectively. Moreover, during the same period, the company’s cash and cash equivalents amounted to $4.89 billion, declining 22.9% compared to $6.34 billion as of December 31, 2022.
For the fiscal third quarter, which ended on September 30, 2023, MKTW’s revenue amounted to $105.79 million. Its net income came in at $140 thousand versus a net loss of $4.01 million in the same period last year. In addition, as of September 30, 2023, the company’s cash and cash equivalents stood at $194.02 million, up 22.4% compared to $158.58 million as of December 31, 2022.
Expected Financial Performance
Street expects HOOD’s revenue for the fiscal fourth quarter (ending December 2023) to come in at $441.69 million. Meanwhile, its EPS for the same quarter is expected to come in at negative $0.03 and remain negative for the fiscal period ending December 2023.
Conversely, analysts predict MKTW’s revenue for the fourth quarter (ending December 2023) to decline 13.7% year-over-year to $110.12 million. However, its EPS for the ongoing quarter is projected to increase 286.3% year-over-year to $0.05.
Profitability
MKTW’s trailing-12-month net income margin of 1.28% compares with HOOD’s negative 41.54%. Additionally, MKTW’s trailing-12-month asset turnover ratio of 1.05x is higher than HOOD’s 0.07x. Furthermore, MKTW’s trailing-12-month gross profit margin of 87.34% is higher than HOOD’s 79.65%.
Thus, MKTW is more profitable.
Valuation
In terms of forward Price/Sales ratio, HOOD’s 5.64x is significantly higher than MKTW’s 0.25x. Likewise, HOOD’s trailing-12-month Price/ Cash Flow multiple of 25.79 is substantially higher than MKTW’s 2.02x.
Thus, MKTW is 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’s D grade for Value is justified by its high valuation compared to the industry norms. In terms of forward Price/Sales, HOOD’s 5.64x is 114.7% higher than the industry average of 2.62x.
On the other hand, MKTW’s A grade for Value is in sync with its discounted Valuation metrics. The stock’s forward Price/Sales multiple of 0.25x is 90.4% lower than the industry average of 2.62x.
Moreover, HOOD has a D grade for Sentiment, which is consistent with its negative analyst estimates. Meanwhile, MKTW’s C grade for Sentiment aligns with its mixed analyst estimates for the to-be-reported quarter.
Furthermore, HOOD’s D grade for Quality is justified by its lower-than-industry profitability. HOOD’s trailing-12-month asset turnover ratio of 0.07x is 66.8% lower than the 0.21x industry average.
In contrast, MKTW’s B grade for Quality is justified by its robust profitability metrics. The stock’s trailing-12-month asset turnover ratio of 1.05x is 397.8% higher than the 0.21x industry average.
Among the 130 stocks in the Software - Application industry, HOOD is ranked #123, while MKTW is ranked #20.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, and Stability. Click here to view HOOD’s ratings. Get all MKTW ratings here.
The Winner
While both HOOD and MKTW should benefit from the promising industry landscape due to a staggering demand for software solutions and robust spending, MKTW’s superior financials, higher profitability, and cheaper valuation could make it a better investment candidate for your portfolio over HOOD.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Software - Application industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
HOOD shares fell $0.11 (-0.91%) in premarket trading Friday. Year-to-date, HOOD has gained 47.79%, versus a 24.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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