Software stocks are rarely inexpensive. Add to that, it’s usually difficult to find software equities trading at attractive multiples while simultaneously sporting wide moat attributes. Fortunately, there’s a difference between “difficult” and “impossible.”
Those possibilities open in broad fashion with the help of exchange traded funds, including the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). While QQQ and QQQM, both of which follow the Nasda-100 Index (NDX), are growth ETFs, there are occasions when some of the stocks residing in the funds sport attractive valuations.
Currently, that’s the case as it pertains to several of the software equities found in these ETFs. This is a relevant point because QQQ and QQQM allocate 49% of their weights to tech stocks. Those lineups are littered with software names.
Examples of QQQ Software Bargains
Zoom Video Communications (ZM), the company that rose to fame during the early days of the coronavirus pandemic, is one of the smaller tech holdings in QQQ and QQQM, but after a couple of years of falling out of favor with investors, it’s valuations are arguably compelling.
“The company offers a differentiated peer-to-peer technology, complete with proprietary routing technology. Zoom is a recognized market leader in meeting software and is disrupting and expanding the $100 billion market for collaboration software with its ease of use and superior user experience,” observed Morningstar analyst Dan Romanoff.
Application software maker Autodesk ADSK is another example of a QQQ/QQQM software holding that looks interesting on valuation. The company has strong subscriber and geographic diversification as its subs number in excess of four million across 180 countries.
Additionally, Autodesk software is used in an array of end markets, including construction, entertainment and gaming, among others. That implies the company isn’t dependent on a narrow number of customers to drive and top and bottom line growth.
“We think Autodesk will remain the industry standard, as its switching costs and network effect continue to reinforce one another and Autodesk stays at the forefront of industry trends. Autodesk now has over 95% of revenue recurring, after a gradual transition from licenses the past eight years. We think the change enables Autodesk to extract greater revenue per user as it upsells its loyal and increasingly maturing base,” noted Morningstar analyst Julie Bhusal Sharma.
Datadog DDOG, which is a QQQ/QQQM holding, is another example of an attractively valued software name.
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