Why investors are suddenly loving these 2 software stocks

Being a software investor has been difficult lately.

Year-to-date, the S&P GSTI Software Index is down 30%, slightly underperforming the broader technology sector. Enterprise, app development, systems infrastructure, and productivity software companies have lost billions of dollars from their valuations.

Luckily there is light at the end of the tunnel.

According to Statista, the global software industry will grow at about 6% annually over the next five years and will reach over $800 billion by 2027. The growth will be largely driven by the digital transformation unfolding around the world as companies seek to become more automated, efficient and competitive.

Last week, two seedy software names with good long-term growth prospects showed signs of life. Web builder Squarespace and mobile technology provider AppLovin staged two-day rallies of 59% and 45%, respectively. Because of this, newfound interest in these stocks could only grow.

Why has Squarespace stock gone up?

Squarespace, Inc. (NYSE:SQSP) released a beat-and-raise quarter that roiled the market about a possible turning point for a stock that had fallen 70% since its IPO last year. Adding to the sudden bullish sentiment was the company’s announcement of a $200 million share buyback program, implying management believes the company is undervalued.

Strong demand for website building and e-commerce tools led customers to Sqaurespace’s all-in-one platform and generated record sales of $208 million. The top-line result beat the consensus by about $4 million and showed that interest in web subscriptions from small businesses and entrepreneurs remains strong two years into the pandemic. Unique Squarespace subscriptions grew 10% to 4.2 million.

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Management raised its full-year revenue guidance to $873 million at the halfway point in anticipation of continued demand for its services. While some sell-side firms struck a cautious note following the report, others were quick to call Squarespace a buy. JMP Securities offered a price target of $45, suggesting the stock has yet to double from current levels.

Squarespace faces companies like Wix and GoDaddy in this space, which are considered well-established brands. However, there seems to be room for multiple winners in an industry that has been rapidly gaining momentum alongside the online shopping boom. Squarespace’s easy-to-use templates and drag-and-drop features resonate well with people who want to create their own online presence but don’t have formal web design training. The stock is also starting to appeal to investors.

Will AppLovin Stock Keep Rising?

AppLovin Corporation (NYSE: APP) debuted in the public markets just before Squarespace and also saw the stock price fall below IPO prices. There may have been a pivot after updating the company’s first quarter. But it wasn’t the financial numbers that caught the market’s interest. In fact, management lowered its revenue guidance for 2022.

In a letter to shareholders, the app monetization specialist said it was considering selling its apps business. AppLovin’s MAX, which helps developers of all shapes and sizes leverage in-app bidding to maximize revenue, has become a popular solution around the world. As the company has reached critical mass with its technology, it is less dependent on data from apps. It said it therefore plans to operate apps as a “separate company,” effectively making it available to potential applicants.

Investors reacted optimistically to the news for two reasons. First, the apps business is likely to fetch a pretty penny if sold, given its widespread adoption across many industries. Second, apps generate lower margins than AppLovin’s software business. That means the company appears to be focused on higher-margin businesses — and that profitability could come sooner than expected.

Although EBITDA has grown well in recent quarters, AppLovin posted a much stronger-than-expected loss in the first quarter. This shows that the more profitable software business is being held back by the highly competitive and less lucrative app business. Ditching apps would allow the company to prioritize profits as it defines its growth strategy over the next few years. Based on full-year guidance, PC and mobile gaming apps will account for more than 60% of revenue this year.

But it’s AppLovin’s fast-growing mobile marketing platform that should excite investors. The AppDiscovery software powered by the MAX monetization solution and the Adjust attribution tool will both benefit from mobile app proliferation. It’s a market that Grand View Research estimates will grow at an annual rate of 11.5% through 2027. As the internet and smartphones reach more and more corners of the world, AppDiscovery’s machine learning capabilities should play a significant role.

Meanwhile, Wall Street is growing increasingly bullish on AppLovin. Bank of America was upgraded to buy from neutral last week, becoming the last to forecast a trend reversal. This month alone, seven out of seven analysts have issued buy recommendations, including Credit Suisse, which sees the stock returning to $100.

Should You Invest $1,000 in Squarespace Now?

Before you consider Squarespace, here’s what you should hear.

MarketBeat tracks Wall Street’s best-in-class, top-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now, before the broader market takes hold… and Squarespace wasn’t on the list.

While Squarespace currently has a “buy” rating among analysts, top-tier analysts believe these five stocks are better buys.

Check out the 5 stocks here

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