Software is rapidly reducing operating expenses for businesses. In the past, the undeniable tailwinds fueling SaaS companies led to lofty valuation multiples that made it easier to raise capital. But this was a double-edged sword as the high prices exposed them to big drawdowns, and unfortunately, the industry has tumbled by 23.6% over the last six months. This drop is a noticeable divergence from the S&P 500’s 7.2% return.
Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. On that note, here are three software stocks we’re swiping left on.
Bandwidth (BAND)
Market Cap: $464.8 million
Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ: BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.
Why Does BAND Worry Us?
- Sales trends were unexciting over the last two years as its 12% annual growth was below the typical software company
- Sky-high servicing costs result in an inferior gross margin of 39.1% that must be offset through increased usage
- Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency
Bandwidth is trading at $14.54 per share, or 0.5x forward price-to-sales. If you’re considering BAND for your portfolio, see our FREE research report to learn more.
Five9 (FIVN)
Market Cap: $1.43 billion
Taking its name from the "five nines" (99.999%) standard for optimal service reliability in telecommunications, Five9 (NASDAQ: FIVN) provides cloud-based software that enables businesses to run their contact centers with tools for customer service, sales, and marketing across multiple communication channels.
Why Should You Dump FIVN?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 9.1% underwhelmed
- Estimated sales growth of 9.3% for the next 12 months implies demand will slow from its two-year trend
- Gross margin of 55.3% reflects its high servicing costs
Five9’s stock price of $18.27 implies a valuation ratio of 1.2x forward price-to-sales. Read our free research report to see why you should think twice about including FIVN in your portfolio.
ZoomInfo (GTM)
Market Cap: $1.95 billion
Operating a platform it calls "RevOS" - short for Revenue Operating System - ZoomInfo (NASDAQ: GTM) provides sales, marketing, and recruiting teams with business intelligence and analytics to identify prospects and deliver targeted outreach.
Why Do We Think GTM Will Underperform?
- Offerings struggled to generate interest as its billings were flat over the last year
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Free cash flow margin is forecasted to shrink by 4.6 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
At $6.38 per share, ZoomInfo trades at 1.5x forward price-to-sales. To fully understand why you should be careful with GTM, check out our full research report (it’s free).
Stocks We Like More
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