Software is rapidly reducing operating expenses for businesses. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 7.1%. This drawdown is a far cry from the S&P 500’s 11% ascent.
A cautious approach is imperative when dabbling in these businesses as their valuations could plummet if AI disrupts their earnings potential. On that note, here are three software stocks that may face trouble.
Okta (OKTA)
Market Cap: $21.67 billion
Named after the meteorological measurement for cloud cover, Okta (NASDAQ: OKTA) provides cloud-based identity management solutions that help organizations securely connect their employees, partners, and customers to the right applications and services.
Why Does OKTA Worry Us?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 10.8% underwhelmed
- Estimated sales growth of 9.1% for the next 12 months implies demand will slow from its two-year trend
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
Okta’s stock price of $120.79 implies a valuation ratio of 7.4x forward price-to-sales. If you’re considering OKTA for your portfolio, see our FREE research report to learn more.
Dropbox (DBX)
Market Cap: $6.44 billion
Originally named after the founders' tendency to "drop" files into a shared folder, Dropbox (NASDAQ: DBX) provides a content collaboration platform that helps individuals and teams store, organize, share, and work on files from anywhere.
Why Should You Sell DBX?
- Flat billings over the last year suggest it may need to improve its products, pricing, or go-to-market strategy to reinvigorate demand
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Operating margin expansion of 6.1 percentage points over the last year shows the company optimized its expenses
Dropbox is trading at $27.14 per share, or 2.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than DBX.
SoundHound AI (SOUN)
Market Cap: $3.50 billion
Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ: SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.
Why Are We Cautious About SOUN?
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 40.6%, one of the worst among software companies
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Negative free cash flow raises questions about the return timeline for its investments
At $8.04 per share, SoundHound AI trades at 15.2x forward price-to-sales. To fully understand why you should be careful with SOUN, check out our full research report (it’s free).
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