From commerce to culture, software is digitizing every aspect of our lives. The undeniable tailwinds fueling SaaS companies have led to lofty valuation multiples historically, but rich prices also make re-ratings harder and place a ceiling on returns - over the past six months, the industry’s 10.1% gain has lagged the S&P 500 by 6.1 percentage points.
Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. Keeping that in mind, here are three software stocks we’re steering clear of.
Dayforce (DAY)
Market Cap: $10.86 billion
Rebranded from Ceridian in January 2024 to highlight its flagship product, Dayforce (NYSE: DAY) provides cloud-based software that helps organizations manage their entire employee lifecycle, including HR, payroll, workforce management, benefits, and talent development.
Why Do We Think Twice About DAY?
- Average billings growth of 13.4% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Gross margin of 50.9% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
At $68.45 per share, Dayforce trades at 5.4x forward price-to-sales. If you’re considering DAY for your portfolio, see our FREE research report to learn more.
F5 (FFIV)
Market Cap: $18.97 billion
Originally named after the F5 tornado, the most powerful on the meteorological scale, F5 (NASDAQ: FFIV) provides security and delivery solutions that protect applications across cloud, data center, and edge environments for large organizations.
Why Does FFIV Worry Us?
- ARR has averaged 9.4% declines over the last year, suggesting that competition is pulling attention away from its software
- Anticipated sales growth of 4.5% for the next year implies demand will be shaky
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
F5 is trading at $335 per share, or 6.1x forward price-to-sales. To fully understand why you should be careful with FFIV, check out our full research report (it’s free).
MicroStrategy (MSTR)
Market Cap: $95.96 billion
Once a traditional business intelligence software provider, MicroStrategy (NASDAQ: MSTR) develops AI-powered enterprise analytics software while also functioning as a major corporate holder of Bitcoin cryptocurrency.
Why Do We Steer Clear of MSTR?
- MicroStrategy’s core analytics software has been eclipsed by its all-in Bitcoin strategy, leaving product innovation and enterprise deals starved for attention
- The company’s debt-financed Bitcoin buying ties shareholder fortunes to crypto swings and interest rates, amplifying downside risk and uncertainty
- On the bright side, its vast Bitcoin treasury gives Executive Chairman Michael Saylor a unique springboard to capture crypto upside and court investors seeking leveraged exposure to digital assets
MicroStrategy’s stock price of $336.40 implies a valuation ratio of 217.2x forward price-to-sales. Check out our free in-depth research report to learn more about why MSTR doesn’t pass our bar.
Stocks We Like More
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