Software is eating the world, and virtually no business is left untouched by it. 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’s six-month gain of 11.4% has trailed the S&P 500’s 22.6%.
A cautious approach is imperative when dabbling in these businesses as their valuations could plummet if AI disrupts their earnings potential. Keeping that in mind, here are three software stocks we’re swiping left on.
Dropbox (DBX)
Market Cap: $7.76 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?
- Offerings struggled to generate interest as its billings were flat over the last year
- Estimated sales decline of 2% for the next 12 months implies a challenging demand environment
- Efficiency has decreased over the last year as its operating margin fell by 4 percentage points
Dropbox’s stock price of $28.75 implies a valuation ratio of 3.2x forward price-to-sales. To fully understand why you should be careful with DBX, check out our full research report (it’s free for active Edge members).
Rapid7 (RPD)
Market Cap: $1.18 billion
With its name inspired by the need for quick responses to cyber threats, Rapid7 (NASDAQ: RPD) provides cybersecurity software and services that help organizations detect vulnerabilities, monitor threats, and respond to security incidents.
Why Do We Steer Clear of RPD?
- Customers were hesitant to make long-term commitments to its software as its 4.2% average ARR growth over the last year was sluggish
- Estimated sales growth of 1.8% for the next 12 months implies demand will slow from its two-year trend
- Operating margin improvement of 1.7 percentage points over the last year demonstrates its ability to scale efficiently
At $19.75 per share, Rapid7 trades at 1.4x forward price-to-sales. If you’re considering RPD for your portfolio, see our FREE research report to learn more.
Tenable (TENB)
Market Cap: $3.46 billion
Starting with the widely-used Nessus vulnerability scanner first released in 1998, Tenable (NASDAQ: TENB) provides exposure management solutions that help organizations identify, assess, and prioritize cybersecurity vulnerabilities across their IT infrastructure and cloud environments.
Why Is TENB Not Exciting?
- Average billings growth of 10.4% 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 7.1% 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
Tenable is trading at $28.99 per share, or 3.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than TENB.
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