Software is eating the world, and virtually no business is left untouched by it. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 3.3%. This performance was disappointing since the S&P 500 climbed 5.8%.
Investors should tread carefully as only some businesses are worthy of their valuations, and luckily for you, we started StockStory to help you find them. On that note, here is one software stock boasting a durable advantage and two we’re swiping left on.
Two SoftwareStocks to Sell:
Q2 Holdings (QTWO)
Market Cap: $5.57 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 Do We Think Twice About QTWO?
- 11.8% annual revenue growth over the last three years was slower than its software peers
- Sky-high servicing costs result in an inferior gross margin of 51.8% that must be offset through increased usage
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.4 percentage points
Q2 Holdings is trading at $89.41 per share, or 7.2x forward price-to-sales. To fully understand why you should be careful with QTWO, check out our full research report (it’s free).
Qualys (QLYS)
Market Cap: $5.05 billion
Founded in 1999 as one of the first subscription security companies, Qualys (NASDAQ: QLYS) provides organizations with software to assess their exposure to cyber-attacks.
Why Does QLYS Worry Us?
- Products, pricing, or go-to-market strategy may need some adjustments as its 5.2% average billings growth over the last year was weak
- Estimated sales growth of 6.6% for the next 12 months implies demand will slow from its three-year trend
- Free cash flow margin is forecasted to shrink by 6.9 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
At $139.15 per share, Qualys trades at 7.7x forward price-to-sales. Read our free research report to see why you should think twice about including QLYS in your portfolio.
One Software Stock to Watch:
Cadence (CDNS)
Market Cap: $88.64 billion
With the name chosen to reflect the idea of a repeating pattern or rhythm in electronic design, Cadence Design Systems (NASDAQ: CDNS) offers a software-as-a-service platform for semiconductor engineering and design.
Why Could CDNS Be a Winner?
- Winning new contracts that can potentially increase in value as its billings growth has averaged 24% over the last year
- Software is difficult to replicate at scale and leads to a best-in-class gross margin of 85.9%
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
Cadence’s stock price of $326 implies a valuation ratio of 16.7x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
When Trump unveiled his aggressive tariff plan in April 2024, markets tanked as investors feared a full-blown trade war. But those who panicked and sold missed the subsequent rebound that’s already erased most losses.
Don’t let fear keep you from great opportunities and take a look at Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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