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12 Best Software Stocks To Buy According To Hedge Funds

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·14 min read
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In this article, we discuss the 12 best software stocks to buy according to hedge funds. If you want to skip our detailed analysis of these stocks, go directly to the 5 Best Software Stocks To Buy According To Hedge Funds.

The software universe is the fastest growing market segment in the technology industry. According to a report by research and advisory firm Forrester, spending in the software sector is expected to increase by 10% in 2021 and close to 11% in 2022. Professional services firm Deloitte contends that cloud computing and artificial intelligence will lead this growth. Consulting firm Gartner has forecast that end-user spending on public cloud services will rise to $482 billion in 2022 from $396 billion in 2021, growing at a rate of over 21%.

Some of the trends that are expected to shape the software industry in the coming years include security spending, custom application development, and the rise of subscription-based models. Applications related to business processes and information management are especially expected to explode in value. Artificial intelligence is also one of the main drivers of the growth in the software market. According to Deloitte, revenues for artificial intelligence products are expected to reach $100 billion by 2025.

Investors who are eager for an inroad into the software market to ride these trends should follow the smart money. Some of the best software stocks to buy right now according to hedge funds include Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Sea Limited (NYSE:SE), among others discussed in detail below. The tech-enabled disruption of the market, facilitated by these companies, has transformed the finance world. Even institutional investors are feeling the heat of this tectonic shift.

Photo by Hack Capital on Unsplash

Our Methodology

With this context in mind, here is our list of the 12 best software stocks to buy according to hedge funds. The aim of the article is to provide a basic rundown of the most popular software stocks among hedge funds.

The list is compiled according to the number of hedge funds having stakes in each company. Data from the 873 funds tracked by Insider Monkey was used for this purpose.

Special importance was assigned to outlining the basic business fundamentals and analyst ratings for each firm to provide readers with some context so they can make more informed investment choices.

Why are we taking into account hedge fund sentiment? Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Best Software Stocks To Buy According To Hedge Funds

12. Intuit Inc. (NASDAQ:INTU)

Number of Hedge Fund Holders: 66

Intuit Inc. (NASDAQ:INTU) is a California-based company that provides software services related to financial management and compliance products. It is placed twelfth on our list of 12 best software stocks to buy according to hedge funds.

On September 14, investment advisory Evercore ISI maintained an Outperform rating on Intuit Inc. (NASDAQ:INTU) stock with a price target of $600. Kirk Materne, an analyst at the advisory, issued the ratings update.

Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Fundsmith LLP is a leading shareholder in Intuit Inc. (NASDAQ:INTU) with 4.5 million shares worth more than $2.2 billion.

11. Snowflake Inc. (NYSE:SNOW)

Number of Hedge Fund Holders: 70

Snowflake Inc. (NYSE:SNOW) is a California-based company that owns and operates a cloud-based data platform. It is ranked eleventh on our list of 12 best software stocks to buy according to hedge funds.

On September 30, investment advisory BTIG upgraded Snowflake Inc. (NYSE:SNOW) stock to Buy from Neutral with a price target of $353, noting that the firm was “sitting in front of a huge opportunity in a rapidly growing data analytics software market”.

At the end of the second quarter of 2021, 70 hedge funds in the database of Insider Monkey held stakes worth $12.5 billion in Snowflake Inc. (NYSE:SNOW), down from 71 in the preceding quarter worth $12.9 billion.

Here is what RiverPark Funds has to say about Snowflake Inc. (NYSE:SNOW) in its Q1 2021 investor letter:

“We also established a position in Snowflake during the quarter. Snowflake offers cloud-based data storage and analytics, generally termed “data warehouse-as-a-service.” The data warehousing market—created by the massive, growing amount of user, customer, and account data and the need to search and analyze it—has historically stored its data on physical servers located on-premises. The cloud data platform market—storing data off-premises on cloud servers—is a relatively new $70 billion+ market. Significantly, incremental warehouse data capacity and renewals are expected to be driven by and to the cloud, with more than 75% of databases in the cloud by 2022.

Snowflake requires absolutely no infrastructure management from its users, is fully scalable for each customer, runs on Amazon, Microsoft, or Google cloud platforms, and most critically, Snowflake helps companies analyze their data. The company also has a unique, customer-aligned billing model based on usage. All of which has led to Snowflake being among the leaders of this highly fragmented market, posting 124% revenue growth last year. SNOW’s growth comes from the combination of more customers—which grew 73% last year—and customers buying more services—the company boasts an amazing 150%+ net customer retention. The company’s growing scale has also led to increasing gross margin and operating leverage, up 1,100 basis points and 8,200 basis points, respectively, over the past two years. The company has guided to FCF break-even this year, and with the company’s capital expenditure-light model—Snowflake uses the public cloud for hosting—we expect FCF to grow much faster than revenue growth, which we forecast to grow comfortably more than 50% per year for the next several years. Additionally, we have great confidence in the SNOW management team, which previously had an enormously successful run guiding one of our other core Cloud software holdings ServiceNow.”

10. Workday, Inc. (NASDAQ:WDAY)

Number of Hedge Fund Holders: 72

Workday, Inc. (NASDAQ:WDAY) is placed tenth on our list of 12 best software stocks to buy according to hedge funds. The firm markets enterprise cloud applications and is headquartered in California.

On September 17, investment advisory Barclays maintained an Overweight rating on Workday, Inc. (NASDAQ:WDAY) stock and raised the price target to $340 from $309. Raimo Lenschow, an analyst at the advisory, issued the ratings update.

At the end of the second quarter of 2021, 72 hedge funds in the database of Insider Monkey held stakes worth $5.18 billion in Workday, Inc. (NASDAQ:WDAY), up from 69 in the previous quarter worth $5.17 billion.

Just like Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Sea Limited (NYSE:SE), Workday, Inc. (NASDAQ:WDAY) is one of the stocks that hedge funds are buying.

In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Workday, Inc. (NASDAQ:WDAY) was one of them. Here is what the fund said:

“In addition to the new issue market, we have been tactically adding growth exposure. We took advantage of the selloff in disruptors that comprise a large portion of the portfolio to initiate a position in enterprise software maker Workday.”

9. MercadoLibre, Inc. (NASDAQ:MELI)

Number of Hedge Fund Holders: 74

MercadoLibre, Inc. (NASDAQ:MELI) is ranked ninth on our list of 12 best software stocks to buy according to hedge funds. The company runs an online ecommerce platform. It is based in Argentina.

On August 5, investment advisory BTIG maintained a Buy rating on MercadoLibre, Inc. (NASDAQ:MELI) stock and raised the price target to $1,930 from $1,370, noting the earnings beat of the firm in the second quarter was driven by take rate expansion and credit growth.

At the end of the second quarter of 2021, 74 hedge funds in the database of Insider Monkey held stakes worth $4 billion in MercadoLibre, Inc. (NASDAQ:MELI), up from 69 in the previous quarter worth $5 billion.

Baron Funds, in its Q1 2021 investor letter, mentioned MercadoLibre, Inc. (NASDAQ:MELI). Here is what the fund has to say in its letter:

“MercadoLibre, Inc., a Latin American e-commerce and FinTech platform, declined in the quarter despite reporting very strong fourth quarter results. MercadoLibre falls into a category of businesses that were net beneficiaries of last year’s lockdowns and reduced consumer gatherings that fell out of favor this quarter as investors looked toward economic reopening and normalization. We are confident in MercadoLibre’s ability to create substantial long-term value as it grows into a regional powerhouse across e-commerce and financial services.”

8. Activision Blizzard, Inc. (NASDAQ:ATVI)

Number of Hedge Fund Holders: 78

Activision Blizzard, Inc. (NASDAQ:ATVI) is a California-based firm that makes and sells interactive gaming content. It is placed eighth on our list of 12 best software stocks to buy according to hedge funds.

On August 13, investment advisory Citi upgraded Activision Blizzard, Inc. (NASDAQ:ATVI) stock to Buy from from Neutral with a price target of $105. Jason Bazinet, an analyst at the advisory, issued the ratings update.

At the end of the second quarter of 2021, 78 hedge funds in the database of Insider Monkey held stakes worth $3.5 billion in Activision Blizzard, Inc. (NASDAQ:ATVI), up from 76 in the preceding quarter worth $3.7 billion.

Alongside Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Sea Limited (NYSE:SE), Activision Blizzard, Inc. (NASDAQ:ATVI) is one of the stocks attracting the attention of institutional investors.

In its Q1 2021 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and Activision Blizzard, Inc. (NASDAQ:ATVI) was one of them. Here is what the fund said:

“The portfolio established a position in video game publisher Activision Blizzard. As a watchlist company we have followed Activision for several years. As a reminder the role of the watchlist is to allow us to focus on a select group of companies where we seek to observe important signals around either value latency, industry trends or management behaviour that portend attractive investment propositions.

Technology can often play a disruptive role in content, however video games are a clear beneficiary of technology, both in terms of more immersive and realistic gaming experiences as well as the monetisation opportunities this creates.

In order to benefit from these trends, video game publishers must be owners of unique IP. Activision Blizzard fits this bill perfectly boasting a portfolio which includes franchises such as Call of Duty, World of Warcraft and Diablo just to name a few.

The business is run by CEO Bobby Kotick, who together with Chairman Brian Kelly purchased the foundation assets for the company for US$400k in the early 1990s. Today Activision has a market capitalisation of over US$70bn. Over the last few years Bobby and his management team have refocused resources onto their best IP, with the goal of capitalising on the aforementioned industry tailwinds.

We saw the benefits of this in 2020 with the release of Call of Duty Mobile and Free-to-Play versions (with in game micro transactions) complimenting the traditional core console game. Engagement increased materially and due to the very favourable economics of content publishing, Operating Income more than doubled for the Call of Duty Franchise. Even adjusting for the impact of lockdowns, this is a phenomenal outcome.

Activision has 3-4 key pieces of IP with which they plan to repeat this playbook over the next couple of years. If they can replicate the success of Call of Duty, even in part, we see material upside to the free cash flow power of the business. Further, revenue sources are broadening which will move the profile away from a traditional lumpy annual release cycle of the old video game model towards one of a more recurring nature. This will transition Activision from a publishing to a services business, likely attracting a higher multiple than the current mid-low 20x FCF which is broadly in line with the market. To summarise, we see significant value latency and a pathway to double digit returns over the medium term.”

7. Twitter, Inc. (NYSE:TWTR)

Number of Hedge Fund Holders: 89

Twitter, Inc. (NYSE:TWTR) is a California-based firm that owns and operates a social networking platform. It is ranked seventh on our list of 12 best software stocks to buy according to hedge funds.

On July 30, investment advisory BMO Capital maintained a Market Perform rating on Twitter, Inc. (NYSE:TWTR) stock and raised the price target to $70 from $65. Daniel Salmon, an analyst at the advisory, issued the ratings update.

At the end of the second quarter of 2021, 89 hedge funds in the database of Insider Monkey held stakes worth $6 billion in Twitter, Inc. (NYSE:TWTR), down from 107 in the preceding quarter worth $4.5 billion.

Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Sea Limited (NYSE:SE) are some of the top software stocks to buy right now, just like Twitter, Inc. (NYSE:TWTR).

RGA Investment Advisors, in its Q1 2021 investor letter, mentioned Twitter, Inc. (NYSE:TWTR). Here is what the fund has to say in its letter:

“‘The bird has wings’—Twitter’s quarter started off somewhat ominously, with Twitter the worst performing stock in the S&P 500 following the January 6th insurrection and questions about the stickiness of the userbase after permanently suspending the account of President Trump.8 By the end of the quarter, Twitter was one of the best performers in the index after exceptionally strong fourth quarter earnings and guidance for the year and an upbeat analyst day that highlighted a rapidly evolving product roadmap placing the timeline at the center of ephemeral (fleets), long form (Revue) and voice (Spaces). The improvements to the experience makes the platform more accessible and provides more opportunity to continue growing the userbase. Importantly, Twitter also embraced what we have been calling “creative empowerment” in previewing SuperFollows and a host of features designed to help content creators and contributors monetize their own audience on Twitter itself. These developments, alongside considerable progress on the advertising platform give us growing conviction that Twitter will deliver on its largely untapped opportunity—in other words, the value creation opportunity on top of the low multiple we were able to build our position at. Elliot spoke at length about these developments on Yet Another Value Podcast with Andrew Walker and The Business Brew with Bill Brewster, which we invite you to check out.”

6. Adobe Inc. (NASDAQ:ADBE)

Number of Hedge Fund Holders: 89

Adobe Inc. (NASDAQ:ADBE) is placed sixth on our list of 12 best software stocks to buy according to hedge funds. The firm operates as a diversified software firm and is headquartered in California.

On September 22, investment advisory Oppenheimer reiterated an Outperform rating on Adobe Inc. (NASDAQ:ADBE) stock and raised the price target to $680 from $600, noting that the fundamental outlook for the firm remained positive despite mixed earnings results.

Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Adobe Inc. (NASDAQ:ADBE) with 6.2 million shares worth more than $3.6 billion.

Microsoft Corporation (NASDAQ:MSFT), Salesforce.com, Inc. (NYSE:CRM), and Sea Limited (NYSE:SE) are some of the elite software stocks to buy right now, along with Adobe Inc. (NASDAQ:ADBE).

Here is what Polen Capital has to say about Adobe Inc. (NASDAQ:ADBE) in its Q1 2021 investor letter:

“Adobe and Autodesk are both prime examples of the rotation that occurred during the quarter. Both are dominant businesses in their respective markets, which are experiencing structural tailwinds. Despite each business’s position of strength, the stocks of cyclicals and businesses with higher leverage and lower profitability were more favored this past quarter. In stark contrast, Adobe and Autodesk both have low leverage, high levels of profitability, high recurring revenues that mitigate cyclicality, and are both capital-light business models—all attributes we appreciate as investors. Adobe and Autodesk were also two of the top three performers within the Portfolio during 2020.”

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Disclosure. None. 12 Best Software Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.