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3 Software Stocks for the Long-Term Investor

Software companies are popular growth investments these days. This makes perfect sense given the digital transformation unfolding across so many industries.Here are three software names worth buying and holding onto...

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This story originally appeared on MarketBeat

Software companies are popular growth investments these days. This makes perfect sense given the digital transformation unfolding across so many industries. Software is expected to play a lead role in helping businesses go digital over the next several years.

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Over the last 10 years, software stocks have produced an annualized return of 23% based on the S&P North American Technology Software Index. They have well outpaced the broader S&P 500 benchmark which has advanced 14% annually. Based on the high growth nature of the software industry, similar outperformance is likely over the next 10 years.

Yet with so many software plays to choose from, its hard to decipher which are the best to own. Software firms that have a lot of room to grow into large, addressable markets are a good place to start. Holding a leadership position in a particular market is also a plus.

Here are three software names worth buying and holding onto for the next three to five years, if not longer.

Is the Splunk Pullback a Buy Opportunity?

Splunk (NASDAQ:SPLK) makes data analytics software that helps customers make more informed business decisions. Its solutions provide real-time insights on operations, apps, security, compliance, and website analytics. They also allow enterprises to analyze big data sets derived from up and company technology like Internet-of-Things (IoT).

Lately, the headlines haven’t been so good for Splunk. Last week CEO Doug Merritt was dismissed by the board leading to a search for new leadership. The surprise announcement came after a series of poor financial performances that relate more to Splunk’s transition to a cloud-based subscription model than the strength of the underlying business.

The reality is Splunk has a strong presence in a rapidly growing data analytics market that offers ample opportunities for product expansion and vertical integration. New product launches in IT infrastructure and security are just two catalysts that can extend Splunk’s track record of high top line growth, not to mention the emerging IoT space. So, with Splunk shares falling 21% last week on leadership uncertainty, long-term investors can get this long-term software winner on sale.

Will ServiceNow Stock Continue to Go Up?

ServiceNow (NYSE:NOW) offers software-as-a-service (SaaS) for enterprises that want to automate and track IT, HR, and various other workflows. It is a highly attractive business model for investors because software subscriptions account for more than 95% of ServiceNow’s revenue. This provides good visibility into the company’s cash flows and growth metrics.

There’s good reason to believe ServiceNow will continue to add handsomely to its nearly 7,000 enterprise customers worldwide. Businesses in seemingly all industries are shifting to digital workflows to better connect with the modern consumer and improve their competitive position. Often the choice is to embark on a digital transformation or risk becoming irrelevant. The Now Platform is likely to be the solution of choice for many due to its reputation for enhancing productivity and financial performance.

And since ServiceNow boasts renewal rates in the upper 90%’s, investors can expect the cash flows (and share price) to grow as the company gathers new customers in existing markets and enters new markets. While almost 40% of revenue comes from outside North America, the international growth runway remains long.

ServiceNow stock has had a huge run over the last few years. But with the digital transformation theme expected to play out well into the current decade, now is still a good time to benefit from this attractive SaaS story.

Is it Too Late to Buy HubSpot Stock?

HubSpot’s (NYSE:HUBS) 108% year-to-date return and $823 share price would appear to be detractors, but the stock is still looking like a long-term buy. That’s because HubSpot’s focus on mid-sized enterprises affords it plenty of opportunity to sell its customer relationship management (CRM) software globally.

The definitions of what makes an enterprise middle-market vary by revenue and employee count, but one thing is for certain—they are a driving force in U.S. business. According to the Harvard Business Review, mid-sized organizations account for approximately one-third of private sector GDP and employment. This makes it an attractive market for software vendors seeking to promote their wares across all sorts of industries.

So, while other CRM players have focused on reeling in the big fish, HubSpot has found its sweet spot by catering to the vast amount of smaller businesses. Some 128,000 organizations around the globe use HubSpot software to better connect with the connected consumer. Enterprises are gravitating towards HubSpot because its CRM platform is designed to be customer-centric rather focused on the seller perspective.

Even though HubSpot has delivered some lofty revenue growth numbers including 49% last quarter, the growth trajectory should stay strong for some time. Future growth is expected to be driven by further market penetration and the cross-selling of new products to its existing base. The company may even be able to grab share in the upper end of the market if it chooses to venture outside its comfort zone.

Businesses are increasingly demanding a modern CRM platform to stay relevant in the post-pandemic economy. Ignore the share price and make a spot for HubSpot in the long-term growth portfolio.