As business demand increases, the software industry delves into offering efficient and innovative solutions to grab market share. Recent transformations, such as the adoption of AI and cloud computing, have added more growth opportunities for the industry.

Therefore, it could be wise to invest in small-cap software stocks Magic Software Enterprises Ltd. (MGIC), Cognyte Software Ltd. (CGNT), and Yalla Group Limited (YALA), which have the potential to deliver solid returns.

Revenue in the software market is expected to reach $704.10 billion in 2024, with enterprise software dominating the market with a projected market volume of $295.20 billion in the same period. Further, the application development software market is expected to be valued at $182.70 billion in 2024 and reach $250.70 billion by 2029, growing at a CAGR of 6.5%.

With rapidly rising business requirements, the enterprise application software market is experiencing robust growth and expansion, driven by trends such as advancements in cloud computing, AI integration, personalized user experience, and emphasis on security and industry-oriented solutions.

Moreover, according to the latest forecast by Gartner, worldwide software spending is expected to total $1.1 trillion in 2024, representing an increase of 12.6% from 2023.

Considering these encouraging industry trends, let’s delve into the fundamentals of the Software – Application stocks mentioned above, beginning with the third choice.

Stock #3: Magic Software Enterprises Ltd. (MGIC)

Headquartered in Or Yehuda, Israel, MGIC provides proprietary application development, vertical software solutions, business process integration, information technology outsourcing software services, and cloud-based services in Israel and internationally. It operates through Software Services; and IT Professional Services segments.

In terms of forward EV/EBIT, MGIC is trading at 8.18x, 57.2% lower than the industry average of 19.10x. Further, the stock’s forward Price/Sales multiple of 0.91 is 66.7% lower than the industry average of 2.72. Similarly, its forward non-GAAP P/E of 10.18x is 55.4% lower than the industry average of 22.82x.

For the first quarter that ended March 31, 2024, MGIC reported revenues of $130.72 million, and its non-GAAP gross profit was $38.31 million. Non-GAAP net income attributable to Magic's shareholders and non-GAAP EPS came in at $11.28 million and $0.23 for the quarter, respectively.

Furthermore, the company’s total current assets were $273.75 million as of March 31, 2024, compared to $256.62 million as of December 31, 2023.

Street expects MGIC’s revenue for the fourth quarter (ending December 2024) to increase 14.6% year-over-year to $143.90 million. Its EPS for the same quarter is expected to grow 14.4% year-over-year to $0.27. Also, the company has topped the consensus revenue and EPS estimates in three of the four trailing quarters.

Shares of MGIC have surged 16.1% over the past nine months to close the last trading session at $10.04.

MGIC’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

MGIC has an A grade for Value and a B grade for Sentiment, Stability, and Quality. It is ranked #8 out of 132 stocks in the Software - Application industry.

In addition to the POWR Ratings we’ve stated above, we also have MGIC’s ratings for Momentum and Growth. Get all MGIC ratings here.

Stock #2: Cognyte Software Ltd. (CGNT)

Based in Herzliya, Israel, CGNT offers investigative analytics software to governments and enterprises globally. The company's Actionable Intelligence for a Safer World is an open software designed to help governments and enterprises accelerate and enhance the effectiveness of investigations.

On July 10, CGNT secured a $10 million follow-on order from a national security agency that is a long-term CGNT customer in the Europe-Middle East-Africa (EMEA) region. With the follow-on order, the agency expanded its strategic investment in CGNT's advanced technology to combat a wide range of threats, such as terrorism, drug trafficking, and weapons smuggling.

In terms of forward EV/Sales, CGNT is trading at 1.34x, 50.5% lower than the industry average of 2.71x. Further, the stock’s forward Price/Sales of 1.50x is 45% lower than the 2.72x industry average.

During the first quarter that ended April 30, 2024, CGNT's total revenue rose 12.7% year-over-year to $82.71 million. Its non-GAAP gross profit grew 17.1% from the prior year's quarter to $58.79 million. The company's adjusted EBITDA came in at $5.02 million, compared to an adjusted loss of $2.28 million in the previous year's quarter.

In addition, the company’s cash and cash equivalents were $98.80 million as of April 30, 2024, versus $74.48 million as of January 31, 2024.

According to the fiscal year 2025 outlook, CGNT expects revenue of $344 million at the midpoint with a range of +/-2%, reflecting 10% growth from its prior year's revenue. Its adjusted EBITDA is expected to be approximately $22 million.

Street expects CGNT’s revenue for the second quarter (ending July 2024) to increase 8.6% year-over-year to $83.69 million. For the fiscal year (ending January 2025), the company’s revenue is expected to grow 9.6% year-over-year to $343.40 million. Furthermore, CGNT topped the consensus EPS and revenue estimates in all of the trailing four quarters.

CGNT’s stock has gained 36.9% over the past year to close the last trading session at $7.16.

CGNT’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

The stock has a B grade for Sentiment, Value, Growth, and Quality. CGNT is ranked #3 among 132 stocks in the Software - Application industry. Click here to access CGNT’s ratings for Stability and Momentum.

Stock #1: Yalla Group Limited (YALA)

Headquartered in Dubai, United Arab Emirates, YALA operates a social networking and gaming platform in the Middle East and North Africa region. The company offers mobile applications like Yalla, a voice-centric group chat platform, and Yalla Ludo, a casual gaming application.

In terms of forward non-GAAP P/E, YALA is trading at 5.48x, 57.4% lower than the industry average of 12.84x. Likewise, the stock’s forward EV/Sales multiple of 0.25 is 86.9% lower than the industry average of 1.90. Also, its forward Price/Cash Flow of 5.29x is 31.1% lower than the industry average of 7.68x.

YALA’s revenues increased 2.5% year-over-year to $81.20 million during the second quarter that ended June 30, 2024. Its non-GAAP operating income rose 13.9% from the year-ago value to $33.51 million. The company’s non-GAAP net income of $35.24 million indicates growth of 4.4% from the prior year’s quarter, while its non-GAAP EPS was $0.19.

Furthermore, the company’s total assets stood at $715.12 million as of June 30, 2024, compared to $638.95 million as of December 31, 2023.

As per the company’s outlook for the third quarter of 2024, YALA expects its revenues to be between $75.0 million and $82.0 million.

Analysts expect YALA’s revenue for the fiscal year (ending December 2025) to increase 13.3% year-over-year to $366.75 million, and its EPS is expected to grow 10.6% year-over-year to $0.78 for the same year. Moreover, the company has topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

YALA’s stock has plunged 17.3% over the past month to close the last trading session at $3.86.

YALA’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

The stock has an A grade for Value and a B grade for Growth, Stability, Quality, and Sentiment. Within the same industry, YALA tops among the 132 stocks. Click here to access all YALA ratings.

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 >

YALA shares were trading at $3.81 per share on Tuesday afternoon, down $0.05 (-1.30%). Year-to-date, YALA has declined -37.85%, versus a 14.60% rise in the benchmark S&P 500 index during the same period.

Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.

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