Are you looking for the next big thing in tech? Check out two software stocks that could deliver strong returns from very different angles.
When it comes to outperforming Wall Street, there isn’t a one-size-fits-all approach. Great companies can be stellar investments even if the stock is soaring to all-time highs. You can afford some more uncertainty if the stock’s valuation is lower.
On that note, let me show you examples of these two strategies. Online advertising technologist The Trade Desk (TTD 1.89%) is the skyrocketing industry leader, while game development and 3D world building expert Unity Software (U 3.54%) is a turnaround story trading at a deep discount.
Picking up either one of these top-shelf stocks from the software industry could help you beat the Street and make a fortune in the long run. They would do it in very different ways, though.
The soaring success story
I won’t score any points for originality by presenting a bull case for The Trade Desk. The digital advertising specialist is roaring back from nearly three years in a sectorwide market downturn — and leading the recovery from the front.
It’s more than a business success story, too. The Trade Desk helps clients maximize the return on their advertising budgets, which was a welcome quality during the inflation-driven downturn. The same advantage will help healthier ad budgets achieve record results when the inflation pressure finally fades out.
On top of these tactics, The Trade Desk created a technical workaround for the digital advertising sector as a whole. Third-party tracking cookies have been depreciated across most of the leading browsers, and will soon be almost completely unusable for tracking the performance of ad campaigns. The Trade Desk’s Unified ID 2.0 (UID2) achieves similar ad-tracking results while preserving the privacy of individual users.
The Trade Desk is an innovator with a five-star track record in financial results. The stock is exploring all-time highs again after a deep dip during the inflation crisis. I can’t find an industry rival matching The Trade Desk’s strong and consistent revenue growth over the last three years. For that reason, I don’t mind paying a modest premium for the stock today.
The promising turnaround play
Unity Software is a different story. The company used to be an unquestioned leader in its chosen field of business, inspiring hordes of game developers and digital media studios to base their next projects on its software.
But Unity’s management made a serious mistake last year. Former CEO John Riccitiello introduced a so-called runtime fee, charging developers a small fee per installation. The move turned out to be highly controversial, especially in the video game community. Small charges per installation can raise large barriers to entry in a market where many games are distributed for free and make money through subscription charges or in-game purchases.
Already fighting the same inflation headwinds as everyone else, Unity Software faced lower interest from game developers. The one-two punch resulted in stalled financial growth. The company parted ways with Riccitiello a year ago, installing new CEO Matt Bromberg in the spring. Interim CEO Jim Whitehurst is now the company’s executive chair. From this position, Whitehurst can continue to apply his software expertise from Red Hat and turnaround success from Delta Air Lines.
This idea isn’t as cut-and-dried as my The Trade Desk recommendation, but Unity Software’s stock comes with the benefit of a robust valuation discount. The stock price is down 52% from its 52-week highs, and shares are changing hands at a very reasonable 4 times sales.
Investors have baked plenty of risk into Unity Software’s stock price, and for good reason. Turnaround efforts are never easy, and in this case, developers have plenty of alternative platforms available.
But I’m inspired by the new management team’s insightful moves. Bromberg has canceled the painful runtime fee for game developers, introduced a more stable fee structure for everybody, and raised prices by about 8% overall. I’m sure Whitehurst played a large part in that policy change. If this dream team can’t put Unity Software back on a winning track, I don’t know who can.
So Unity Software’s stock is affordable for good reason. At the same time, I give this turnaround effort an above-average chance of success. All things considered, the stock looks worthy of a modest investment right about now.
Anders Bylund has positions in The Trade Desk. The Motley Fool has positions in and recommends The Trade Desk and Unity Software. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
