Software is eating the world, and virtually no business is left untouched by it. Companies bringing it to life have been rewarded with explosive earnings growth, and the upward trend shows no signs of stopping - over the past six months, the industry has posted a gain of 9.1% while the S&P 500 was flat.
However, only a handful of companies will ultimately thrive over the long term as the low barriers to entry for software businesses lead to fierce competition. Taking that into account, here are three software stocks best left ignored.
Bandwidth (BAND)
Market Cap: $423.3 million
Started in 1999 by David Morken who was later joined by Henry Kaestner as co-founder in 2001, Bandwidth (NASDAQ: BAND) provides thousands of customers with a software platform that uses its own global network to provide phone numbers, voice, and text connectivity.
Why Do We Steer Clear of BAND?
- 15.1% annual revenue growth over the last three years was slower than its software peers
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Gross margin of 37.4% is way below its competitors, leaving less money to invest in areas like marketing and R&D
At $15.26 per share, Bandwidth trades at 0.6x forward price-to-sales. Check out our free in-depth research report to learn more about why BAND doesn’t pass our bar.
Q2 Holdings (QTWO)
Market Cap: $4.48 billion
Founded in 2004 by Hank Seale, Q2 (NYSE: QTWO) offers software-as-a-service that enables small banks to provide online banking and consumer lending services to their clients.
Why Is QTWO Not Exciting?
- 11.7% annual revenue growth over the last three years was slower than its software peers
- Gross margin of 50.9% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Suboptimal cost structure is highlighted by its history of operating losses
Q2 Holdings’s stock price of $75.89 implies a valuation ratio of 6.2x forward price-to-sales. If you’re considering QTWO for your portfolio, see our FREE research report to learn more.
Agilysys (AGYS)
Market Cap: $2.09 billion
Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ: AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.
Why Are We Cautious About AGYS?
- Gross margin of 62.7% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 4.7 percentage points over the next year
Agilysys is trading at $75.28 per share, or 6.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AGYS.
Stocks We Like More
With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.
Put yourself in the driver’s seat by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.
