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Why Investors Suddenly Love These 2 Software Stocks

Web builder Squarespace and mobile tech provider AppLovin staged two-day rallies of 59% and 45% respectively. Here's why the newfound interest in these stocks may only get stronger.

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This story originally appeared on MarketBeat

Lately it's been hard to be a software investor.

MarketBeat.com - MarketBeat

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

Thankfully there's light at the end of the tunnel.

According to Statista, the global software industry will grow around 6% annually over the next five years and top $800 billion by 2027. The growth will be largely driven by the digital transformation unfolding worldwide as businesses look to become more automated, efficient, and competitive.

Last week, a pair of downtrodden software names with good long-term growth prospects flashed signs of life. Web builder Squarespace and mobile tech provider AppLovin staged two-day rallies of 59% and 45% respectively. Here's why the newfound interest in these stocks may only get stronger.

Why Did Squarespace Stock Go Up?

Squarespace, Inc. (NYSE: SQSP) posted a beat and raise quarter that got the market buzzing about a potential turning point for a stock that had plunged 70% since last year's IPO. Adding to the sudden bullish sentiment was the company's announcement of a $200 million share buyback program which implies that management feels it's undervalued.

Strong demand for website building and e-commerce tools drove customers to Sqaurespace's all-in-one platform and generated a record $208 million in sales. The top line result beat consensus by about $4 million and showed that interest amongst small businesses and entrepreneurs for web subscriptions remains robust some two years since the start of the pandemic. The number of unique Squarespace subscriptions climbed 10% to 4.2 million.

Management raised its full year revenue guidance to $873 million at the midpoint in anticipation of ongoing demand for its services. While some sell-side firms struck a cautious tone following the report, others were quick to call Squarespace a buy. JMP Securities offered a $45 price target which suggests the stock can still double from current levels.

Squarespace faces plenty of competition in this space with the likes of Wix and GoDaddy considered established brands. However, there appears to be room for multiple winners in an industry that has quickly taken off alongside the online shopping boom. Squarespace's user-friendly templates and drag-and-drop features resonate well with people that want to create their own online presence but lack formal web design training. The stock is also starting to resonate with investors.

Will AppLovin Stock Keep Going Up?

AppLovin Corporation (NYSE: APP) debuted in the public markets shortly before Squarespace and also saw its share price slip below IPO pricing. A pivot may have occurred after the company's first quarter update. Yet it wasn't the financial figures that piqued the market's interest. In fact, management lowered its 2022 revenue outlook.

In a letter to shareholders, the app-monetization specialist said it is considering a sale of its Apps business. AppLovin's MAX, which helps developers of all shapes and sizes use in-app bidding to maximize revenue, has grown into a popular solution worldwide. Having reached a critical mass with its technology, the company is less dependent on the data from Apps. It said it therefore plans to operate Apps as "a stand-alone business," which effectively dangles it out there for prospective suitors.

Investors were bullish on the news for two reasons. First, if sold, the Apps business is likely to fetch a pretty penny given its widespread presence across many industries. Second, Apps generates lower margins than AppLovin's software business. This means that the company appears to be focused on higher margin businesses—and that profitability may arrive sooner than expected.

Although EBITDA has grown nicely over the past few quarters, AppLovin recorded a much steeper 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 apps business. Shedding 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 is AppLovin's rapidly growing mobile marketing platform that investors should be excited about. The AppDiscovery software powered by the MAX monetization solution and the Adjust attribution tool both stand to benefit from the proliferation of mobile apps. It is a market that Grand View Research estimates will expand 11.5% annually through 2027. As the internet and smartphones reach more corners of the world, AppDiscovery's machine learning capabilities should play a significant role.

In the meantime, Wall Street is becoming increasingly bullish on AppLovin. Bank of America upgraded from neutral to buy last week, becoming the latest to predict a turnaround. This month alone, a perfect seven of seven analysts have issued buy ratings, including Credit Suisse which sees the stock returning to $100.

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