Software is rapidly reducing operating expenses for businesses. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have capped returns lately as the industry was flat over the past six months and trailed the S&P 500’s 7.7% gain.
A cautious approach is imperative when dabbling in these businesses as the best will deliver robust earnings growth while the rest will be disrupted by competition and AI. On that note, here is one resilient software stock at the top of our wish list and two we’re passing on.
Two Software Stocks to Sell:
Domo (DOMO)
Market Cap: $133.6 million
Named for the Japanese word meaning "thank you very much," Domo (NASDAQ: DOMO) provides a cloud-based business intelligence platform that connects people with real-time data and insights across organizations.
Why Is DOMO Risky?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 1.3% underwhelmed
- Projected sales decline of 1.7% for the next 12 months points to an even tougher demand environment ahead
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
Domo is trading at $3.52 per share, or 0.5x forward price-to-sales. Check out our free in-depth research report to learn more about why DOMO doesn’t pass our bar.
Asure Software (ASUR)
Market Cap: $248.7 million
Operating in the often-overlooked smaller metropolitan markets where HR expertise can be scarce, Asure Software (NASDAQ: ASUR) provides cloud-based human capital management software and services that help small and medium-sized businesses manage payroll, taxes, time tracking, and HR compliance.
Why Are We Wary of ASUR?
- Sales trends were unexciting over the last two years as its 12.3% annual growth was below the typical software company
- Estimated sales growth of 10.4% for the next 12 months implies demand will slow from its two-year trend
- Poor free cash flow margin of 5.3% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $8.27 per share, Asure Software trades at 1.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ASUR.
One Software Stock to Watch:
Dynatrace (DT)
Market Cap: $11.77 billion
With its platform processing over 30 trillion pieces of IT performance data daily, Dynatrace (NYSE: DT) provides an AI-powered platform that helps organizations monitor, secure, and optimize their applications and IT infrastructure across cloud environments.
Why Does DT Stand Out?
- Average billings growth of 24% over the last year enhances its liquidity and shows there is steady demand for its products
- Software is difficult to replicate at scale and results in a top-tier gross margin of 81.7%
- Robust free cash flow margin of 26.2% gives it many options for capital deployment
Dynatrace’s stock price of $44.77 implies a valuation ratio of 5.7x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
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