3 Software Stocks with Big Upside: Undervalued Gems in the Tech Sector

In the ever-evolving tech sector, some software stocks have temporarily underperformed due to business model changes or accounting quirks, presenting attractive investment opportunities for those who can see beyond the short-term noise. Here, we highlight three undervalued software stocks with big upside potential: Splunk (SPLK), Nutanix (NTNX), and Alteryx (AYX).



1. Splunk (SPLK):
Splunk is an observability software company that enables large enterprises to survey their IT infrastructure, network, and security in real-time. The company is undergoing a transition from selling perpetual licenses to subscriptions and moving to the cloud, which has temporarily affected headline revenues. However, Splunk's cloud offerings have just exceeded 50% of total bookings, and its total annual recurring revenue (ARR) growth of 37% indicates a robust underlying business. Splunk's stock is trading about 33% below its all-time high set a year ago, and at roughly 8 times its projected ARR for this fiscal year, making it a bargain in the software world.
2. Nutanix (NTNX):
Nutanix is a leader in hyperconverged infrastructure, providing a seamless working environment across multiple clouds and data centers from a single interface. The company is transitioning from selling its software in a perpetual license tied to a device, along with hardware, to a software-as-a-service model. This transition has affected its GAAP results, with revenue growth of only 7% in its recent fiscal year. However, annual contract value grew a healthier 26%, and annual recurring revenue surged 83%, showing that customers are rapidly converting to the company's more modern offerings. Nutanix's 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 among software-as-a-service companies.
3. Alteryx (AYX):
Alteryx is a leader in data analytics software, providing a platform that enables users to prepare, blend, and analyze data from various sources to gain insights and make data-driven decisions. The company is transitioning from perpetual licenses to subscriptions, which has led to a quirk in its financial results due to new accounting rules. However, Alteryx's underlying business remains strong, with revenue growth of 23% in 2023. The company's commitment to research and development, as well as its strategic partnerships with industry giants like Fetch TV and Roku, position it for growth in the digital entertainment technology sector. Alteryx's stock is trading about 33% below its all-time high set in 2021, and at a price-to-sales ratio of around 5.5 – significantly lower than the average for software-as-a-service companies.

These three software stocks stand out as potential investments due to their unique business models, strong growth prospects, and durable competitive advantages. Their ability to adapt to changing market conditions and capitalize on emerging trends in their respective sectors makes them attractive options for investors seeking exposure to the software industry. By focusing on the long-term growth prospects of these companies and staying informed about their progress, investors can capitalize on the big upside potential these undervalued gems offer.