From commerce to culture, software is digitizing every aspect of our lives. This secular theme has materialized in superior earnings growth and stock price performance for most SaaS companies, and over the last six months, the industry’s 45.2% return has topped the S&P 500 by 31.3 percentage points.
Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. On that note, here are three software stocks best left ignored.
Elastic (ESTC)
Market Cap: $9.01 billion
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE: ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Does ESTC Worry Us?
- Estimated sales growth of 14.6% for the next 12 months implies demand will slow from its two-year trend
- Customer acquisition costs are recovered fairly quickly, allowing the company to invest in growth initiatives
- Operating margin improvement of 1.8 percentage points over the last year demonstrates its ability to scale efficiently
Elastic is trading at $86.66 per share, or 4.5x forward price-to-sales. If you’re considering ESTC for your portfolio, see our FREE research report to learn more.
Marqeta (MQ)
Market Cap: $1.7 billion
Powering the cards behind innovative fintech services like Block's Cash App, Marqeta (NASDAQ: MQ) provides a cloud-based platform that allows businesses to create customized payment card programs and process card transactions.
Why Are We Hesitant About MQ?
- Revenue increased by 11% annually over the last five years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Free cash flow margin is forecasted to shrink by 8.9 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
At $16.39 per share, Marqeta trades at 2.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MQ.
Strategy (MSTR)
Market Cap: $35.75 billion
Once a traditional business intelligence software provider, Strategy (NASDAQ: MSTR) develops AI-powered enterprise analytics software while also functioning as a major corporate holder of Bitcoin cryptocurrency.
Why Do We Think MSTR Will Underperform?
- MicroStrategy’s core analytics software has been eclipsed by its all-in Bitcoin strategy, leaving product innovation and enterprise deals starved for attention
- The company’s debt-financed Bitcoin buying ties shareholder fortunes to crypto swings and interest rates, amplifying downside risk and uncertainty
- On the bright side, its vast Bitcoin treasury gives Executive Chairman Michael Saylor a unique springboard to capture crypto upside and court investors seeking leveraged exposure to digital assets
Strategy’s stock price of $93.09 implies a valuation ratio of 67.9x forward price-to-sales. Check out our free in-depth research report to learn more about why MSTR doesn’t pass our bar.
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