Down More Than 40% YTD, these 4 Software Stocks are Still Overvalued

The possibility of multiple interest rate hikes amid historically high inflation and Russia’s invasion of Ukraine have fostered significant market volatility this year, hurting the technology sector. And concerns that sanctions imposed by the West over Russia’s invasion of Ukraine could keep fuel market volatile in the near term.

Negative investor sentiment toward the software industry is evidenced by the iShares Expanded Tech-Software Sector ETF’s (IGV) 14.8% year-to-date decline. But despite declining significantly, many software stocks still look overvalued at their current price levels due to their weak financials and growth prospects.

Software stocks Affirm Holdings, Inc. (AFRM), Toast, Inc. (TOST), Fastly, Inc. (FSLY), and Matterport, Inc. (MTTR) have retreated more than 40% year-to-date, but they still look overvalued at their current price levels. So, we think these stocks are best avoided now.

Click here to check out our Software Industry Report for 2022

Affirm Holdings, Inc. (AFRM)

AFRM in San Francisco., operates a digital and mobile-first commerce platform in the United States and Canada. The company's platform includes point-of-sale payment solutions for consumers, merchant commerce solutions, and a consumer-focused app. It has approximately 29,000 merchants integrated into its platform. 

AFRM’s total net revenues were $361.01 million for its fiscal year 2022 second quarter, ended Dec. 31, 2021, up 76.9% year-over-year. However, its comprehensive loss increased 537.4% year-over-year to $158.05 million, while its net loss per share increased 50% year-over-year to $0.57. Furthermore, its total liabilities came in at $4.48 billion for the period ended Dec. 31, 2021, compared to $2.29 billion for the period ended June 30, 2021.

AFRM has declined 61% in price year-to-date to close Friday’s trading session at $39.19. In terms of forward EV/S, AFRM’s 9.60x is 177.3% higher than the 3.46x industry average. And its 8.46x forward P/S is 139.1% higher than the 3.54x industry average.

Analysts expect AFRM’s EPS to remain negative in fiscal 2022 and 2023. Its EPS is estimated to fall 24.6% per annum for the next five years.

AFRM’s POWR Ratings reflect its poor prospects. It has an overall F grade, which indicates a Strong Sell. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Also, the stock has an F grade for Stability and Sentiment and a D grade for Value and Quality. Click here to access the additional POWR Ratings for AFRM (Momentum and Growth). AFRM is ranked #78 of 81 stocks in the D-Rated Technology - Services industry.

Toast, Inc. (TOST)

Boston-based TOST operates a cloud-based technology platform for the restaurant industry in the United States and Ireland. The company is an all-in-one digital technology platform built for restaurants of all sizes.

TOST’s total revenue increased 110.7% year-over-year to $512 million for the fourth quarter, ended Dec. 31, 2021. However, its loss from operations came in at $116 million, up 103.5% year-over-year. Also, its total current liabilities were $352 million for the period ended Dec. 31, 2021, compared to $136 million for the period ended Dec. 31, 2020. And the company’s total liabilities came in at $644 million, versus $398 million, for the same period.

The stock has declined 41.6% in price year-to-date to close Friday’s trading session at $20.26. In terms of forward EV/S, TOST’s 3.81x is 10.2% higher than the 3,46x industry average. Furthermore, its 4.30x forward P/S is higher than the 3.54x industry average.

Analysts expect TOST’s EPS to remain negative in its fiscal year 2022.

TOST has an overall D grade, which equates to a Sell in our proprietary rating system. In addition, it has a D grade for Value, Stability, Sentiment, and Quality.

We’ve also rated  TOST  for Growth and Momentum. Click here to access all the TOST ratings. TOST is ranked #50 of 58 stocks in the D-Rated Software - Business industry.

Fastly, Inc. (FSLY)

FSLY operates an edge cloud platform for processing, serving, and securing its customer's applications in the United States, the Asia Pacific, Europe, and internationally. The San Francisco-based company combines the world’s fastest global edge cloud network with powerful software.

For its fiscal fourth quarter, ended Dec. 31, 2021, FSLY’s revenue increased 18.2% year-over-year to $97.72 million. However, its non-GAAP net loss came in at $11.65 million, up 11.2% year-over-year, while its non-GAAP loss per share was $0.10, up 11.1% year-over-year. Also, its adjusted EBITDA came in at a loss of $3.51 million, compared to a $3.39 million loss in the year-ago period.

The stock has declined 47.3% in price year-to-date to close Friday’s trading session at $18.69. In terms of forward EV/Sales, FSLY’s 5.39x is higher than the 3.46x industry average. Also, its 5.40x forward P/Sis 52.6% higher than the 3.54x industry average.

Analysts expect FSLY’s EPS to fall 16.7% for the quarter ended March 31, 2022. Its EPS is estimated to remain negative in its fiscal 2022 and 2023.

FSLY’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system. In addition, the stock has an F grade for Quality and a D grade for Stability, Value, Momentum, and Sentiment.

We also have graded FSLY for Growth. Click here to access all FSLY’s ratings. It is ranked #158 of 165 stocks in the Software - Application industry.

Matterport, Inc. (MTTR)

MTTR is a spatial data company that focuses on digitizing and indexing the built world. It offers Matterport digital twins, a 3D data platform to design, build, operate, promote, and understand spaces. MTTR is headquartered in Sunnyvale, Calif.

MTTR’s total revenue increased 14.8% year-over-year to $27.09 million for the fourth quarter, ended Dec. 31, 2021. However, its non-GAAP loss increased 937.5% year-over-year to $25.09 million, while its non-GAAP loss per share came in at $0.10, up 900% year-over-year. Also, its total liabilities were $451.01 million for the period ended December 31, 2021, compared to $28.38 million for the period ended Dec. 31, 2020.

The stock has declined 66.2% in price year-to-date to close Friday’s trading session at $6.98. In terms of forward EV/S, MTTR’s 10.56x is significantly higher than the 3.46x industry average. Also,  its 13.56x forward P/S is also higher than the 3.54x industry average.

MTTR’s EPS is expected to decline by 108.7% in 2022. And its EPS is estimated to remain negative in fiscal 2022 and 2023.

MTTR has an overall F grade, which indicates a Strong Sell. Also, the stock has an F grade for Stability and Quality and a D grade for Value and Sentiment.

Click here to access the additional POWR Ratings for MTTR (Momentum and Growth). MTTR is ranked #157 of 165 stocks in the F-Rated Software - Application industry.

Click here to check out our Software Industry Report for 2022

AFRM shares fell $0.56 (-1.43%) in premarket trading Monday. Year-to-date, AFRM has declined -61.66%, versus a -9.00% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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