Software is rapidly reducing operating expenses for businesses. Companies bringing it to life have been rewarded with explosive earnings growth, and the upward trend shows no signs of stopping as the industry has posted a 42.2% gain over the past six months, beating the S&P 500 by 25.3 percentage points.
Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. With that said, here is one resilient software stock at the top of our wish list and two we’re steering clear of.
Two Software-as-a-Service Stocks to Sell:
Amplitude (AMPL)
Market Cap: $1.58 billion
Born out of a failed voice recognition startup by founder Spenser Skates, Amplitude (NASDAQ: AMPL) is data analytics software helping companies improve and optimize their digital products.
Why Are We Cautious About AMPL?
- Average billings growth of 5.5% was subpar, suggesting it’s struggled to push its software and might have to lower prices to stimulate demand
- Net revenue retention rate of 97.3% shows it has a tough time retaining customers
- Track record of operating losses stem from its decision to pursue growth instead of profits
Amplitude’s stock price of $12.36 implies a valuation ratio of 4.9x forward price-to-sales. Check out our free in-depth research report to learn more about why AMPL doesn’t pass our bar.
Palo Alto Networks (PANW)
Market Cap: $123 billion
Founded in 2005 by cybersecurity engineer Nir Zuk, Palo Alto Networks (NASDAQ: PANW) makes hardware and software cybersecurity products that protect companies from cyberattacks, breaches, and malware threats.
Why Are We Wary of PANW?
- Products, pricing, or go-to-market strategy may need some adjustments as its 4.2% average billings growth is weak
At $190 per share, Palo Alto Networks trades at 7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PANW.
One Software-as-a-Service Stock to Watch:
MongoDB (MDB)
Market Cap: $20.71 billion
Started in 2007 by the team behind Google’s ad platform, DoubleClick, MongoDB offers database-as-a-service that helps companies store large volumes of semi-structured data.
Why Are We Fans of MDB?
- Winning new contracts that can potentially increase in value as its billings growth has averaged 26.1% over the last year
- Customers use its software daily and increase their spending every year, as seen in its 120% net revenue retention rate
- Estimated revenue growth of 15.7% for the next 12 months implies its momentum over the last three years will continue
MongoDB is trading at $278.33 per share, or 9.3x forward price-to-sales. Is now a good time to buy? See for yourself in our full research report, it’s free.
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