From commerce to culture, software is digitizing every aspect of our lives. The undeniable tailwinds fueling the industry have also led to decent returns for SaaS stocks lately as they’ve gained 5.7% over the past six months. This performance was almost identical to the S&P 500.
Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. Taking that into account, here is one resilient software stock at the top of our wish list and two we’re passing on.
Two Software Stocks to Sell:
DocuSign (DOCU)
Market Cap: $10.1 billion
Creating the digital equivalent of "sign on the dotted line" for over a billion users worldwide, DocuSign (NASDAQ: DOCU) provides an agreement management platform that enables businesses to electronically prepare, sign, and manage documents and contracts.
Why Do We Steer Clear of DOCU?
- Underwhelming ARR growth of 8.5% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
DocuSign’s stock price of $53.17 implies a valuation ratio of 2.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than DOCU.
Pegasystems (PEGA)
Market Cap: $4.70 billion
With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.
Why Do We Avoid PEGA?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 3.6% underwhelmed
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 6.5 percentage points
Pegasystems is trading at $28.50 per share, or 2.4x forward price-to-sales. Read our free research report to see why you should think twice about including PEGA in your portfolio.
One Software Stock to Buy:
Shopify (SHOP)
Market Cap: $165.1 billion
Starting with just three people selling snowboards online in 2004, Shopify (NASDAQ: SHOP) provides a comprehensive platform that enables merchants of all sizes to create, manage and grow their businesses across multiple sales channels.
What Makes SHOP Stand Out?
- Average billings growth of 32.3% over the last year enhances its liquidity and shows there is steady demand for its products
- Revenue outlook for the upcoming 12 months is outstanding and shows it’s on track to gain market share
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
At $126.83 per share, Shopify trades at 9.5x forward price-to-sales. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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