3 High-Growth Software Stocks That Are Actually Cheap

“Software is eating the world,” said noted venture capitalist Marc Andreessen back in 2011. Judging by the booming revenue growth and stock market appreciation of many software stocks over the past decade, he was most certainly right. That’s why, after a decade of cloud and software disruption, many software winners now trade at very lofty valuations, often 20 times sales or more.

However, some quality software stocks can be had for much less, even though they have attractive products and outlooks. How? Well, several older software players are currently going through business model changes. Some are switching from perpetual licenses to annual subscriptions, or transitioning to a cloud-based model. 

These transitions can affect headline revenues, even if the underlying business is strong — and that can lead to opportunity for investors. Here are three high-quality software stocks to be had on the cheap today. 

Splunk

Observability software company Splunk (NASDAQ:SPLK) makes software that enables large enterprises to survey their IT infrastructure, network, and security in real time, helping to identify any issues that may arise with customer- or employee-facing applications. Since enterprises are only becoming more and more distributed and digital, observability tools like Splunk’s are growing more important.

Splunk is undergoing not one but two transitions at once: from selling perpetual licenses to subscriptions, and beginning to deliver its software on the cloud, as opposed to on-premises data centers.

The company began in its transition later than some — about two years ago, in fact. That means the main impact of the transition happened last year, when top-line revenue declined 5% on a GAAP basis. That’s because selling a perpetual license for many years recognizes all that revenue up front, whereas annual subscriptions spread the revenue out over the length of the term. So revenue can fall when a business makes this transition. 

However, it looks as though Splunk is getting through the worst of the impact. Revenue growth has turned positive this year, as Splunk’s cloud offerings have just exceeded 50% of total bookings. While overall revenue grew 23%, the company’s total annual recurring revenue (ARR) growth, which is a better indicator of overall business growth, was higher, at 37%. And cloud-based ARR was up a whopping 72%.

Despite this improvement, Splunk still trades about 33% below its all-time high set a year ago, and at roughly 8 times its projected ARR for this fiscal year. In the software world, that’s a bargain for a company showing accelerating cloud growth.

Nutanix

One stock that has not struggled recently is Nutanix (NASDAQ:NTNX), which is up nearly 20% over the past month and up 34% on the year. However, the stock still trades about 33% below the all-time highs set back in 2018 and trades for only around 6 times sales – practically a value stock…