Software is rapidly reducing operating expenses for businesses. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have weighed on the returns lately as the industry has pulled back by 13.1% over the past six months. This drop is a far cry from the S&P 500’s 9.5% ascent.
A cautious approach is imperative when dabbling in these businesses as their valuations could plummet if AI disrupts their earnings potential. Taking that into account, here are three software stocks we’re steering clear of.
Workday (WDAY)
Market Cap: $49.74 billion
Born from the vision of PeopleSoft founders after Oracle's hostile takeover of their previous company, Workday (NASDAQ: WDAY) provides cloud-based software for financial management, human resources, planning, and analytics to help organizations manage their business operations.
Why Does WDAY Worry Us?
- Customers were hesitant to make long-term commitments to its software as its 13.8% average ARR growth over the last year was sluggish
- Estimated sales growth of 12.9% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 1.6 percentage points over the last year as it scaled and became more efficient
At $187.91 per share, Workday trades at 4.9x forward price-to-sales. If you’re considering WDAY for your portfolio, see our FREE research report to learn more.
Dropbox (DBX)
Market Cap: $6.79 billion
Originally named after the founders' tendency to "drop" files into a shared folder, Dropbox (NASDAQ: DBX) provides a content collaboration platform that helps individuals and teams store, organize, share, and work on files from anywhere.
Why Do We Steer Clear of DBX?
- Flat billings over the last year suggest it may need to improve its products, pricing, or go-to-market strategy to reinvigorate demand
- Forecasted revenue decline of 1.1% for the upcoming 12 months implies demand will fall off a cliff
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 1.9 percentage points
Dropbox’s stock price of $26.21 implies a valuation ratio of 2.8x forward price-to-sales. To fully understand why you should be careful with DBX, check out our full research report (it’s free).
Fastly (FSLY)
Market Cap: $1.48 billion
Taking its name from the core advantage it delivers to customers, Fastly (NYSE: FSLY) operates an edge cloud platform that processes, secures, and delivers web content as close to end users as possible, enabling faster digital experiences.
Why Do We Think FSLY Will Underperform?
- Customers generally do not adopt complementary products as its 103% net revenue retention rate lags behind the industry standard
- Gross margin of 55% reflects its high servicing costs
- Poor expense management has led to operating margin losses
Fastly is trading at $9.99 per share, or 2.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FSLY.
Stocks We Like More
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The names generating the next wave of massive growth are right here in 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 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.
