Software is rapidly reducing operating expenses for businesses. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 39.5% over the past six months, outpacing the S&P 500’s 14.2% rise.
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. Taking that into account, here are three software stocks we’re steering clear of.
Appian (APPN)
Market Cap: $2.74 billion
Powering billions of transactions daily since its founding in 1999, Appian (NASDAQ: APPN) provides a low-code platform that helps businesses automate complex processes and operationalize artificial intelligence without extensive programming knowledge.
Why Is APPN Not Exciting?
- Estimated sales growth of 12.2% for the next 12 months implies demand will slow from its two-year trend
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Operating margin expanded by 3.4 percentage points over the last year as it scaled and became more efficient
At $38.31 per share, Appian trades at 2.8x forward price-to-sales. Check out our free in-depth research report to learn more about why APPN doesn’t pass our bar.
Q2 Holdings (QTWO)
Market Cap: $3.86 billion
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE: QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Does QTWO Give Us Pause?
- Average billings growth of 7.7% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 9.6% for the next 12 months implies demand will slow from its two-year trend
- Sky-high servicing costs result in an inferior gross margin of 57% that must be offset through increased usage
Q2 Holdings’s stock price of $61.38 implies a valuation ratio of 4.3x forward price-to-sales. To fully understand why you should be careful with QTWO, check out our full research report (it’s free).
Manhattan Associates (MANH)
Market Cap: $12.33 billion
Built on a "versionless" cloud architecture that delivers quarterly updates to all customers, Manhattan Associates (NASDAQ: MANH) develops cloud-based software that helps retailers, wholesalers, and manufacturers manage their supply chains, inventory, and omnichannel operations.
Why Do We Think Twice About MANH?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 6.5% underwhelmed
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 55.8%, one of the worst among software companies
- Efficiency has decreased over the last year as its operating margin fell by 1.5 percentage points
Manhattan Associates is trading at $211.58 per share, or 9.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MANH.
Stocks We Like More
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