From commerce to culture, software is digitizing every aspect of our lives. 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 13.4% 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. Keeping that in mind, here is one software stock poised to generate sustainable market-beating returns and two best left ignored.
Two Software Stocks to Sell:
Appian (APPN)
Market Cap: $3.18 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 Are We Cautious About APPN?
- Revenue increased by 14.6% annually over the last two years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Projected 6 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Appian’s stock price of $42.86 implies a valuation ratio of 4.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than APPN.
Bandwidth (BAND)
Market Cap: $477.7 million
Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ: BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.
Why Does BAND Worry Us?
- Annual revenue growth of 12.9% over the last two years was below our standards for the software sector
- Gross margin of 38.8% reflects its high servicing costs
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
At $15.65 per share, Bandwidth trades at 0.5x forward price-to-sales. Read our free research report to see why you should think twice about including BAND in your portfolio.
One Software Stock to Watch:
Dynatrace (DT)
Market Cap: $13.62 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?
- Annual revenue growth of 19.5% over the last two years was superb and indicates its market share is rising
- Prominent and differentiated software leads to a stellar gross margin of 81.8%
- Robust free cash flow margin of 25.5% gives it many options for capital deployment
Dynatrace is trading at $45.30 per share, or 6.4x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
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