From commerce to culture, software is digitizing every aspect of our lives. 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 22.4% over the past six months. This performance is a noticeable divergence from the S&P 500’s 3.1% return.

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 best left ignored.

Commerce (CMRC)

Market Cap: $241.7 million

As a founding member of the MACH Alliance advocating for modern tech standards, Commerce (NASDAQ: CMRC) provides a SaaS platform that enables businesses to build and manage online stores, connect with marketplaces, and integrate with point-of-sale systems.

Why Are We Out on CMRC?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 2.3% underwhelmed
2. Estimated sales growth of 3.1% for the next 12 months implies demand will slow from its two-year trend
3. Poor free cash flow margin of 4.8% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Commerce is trading at $2.94 per share, or 0.7x forward price-to-sales. If you’re considering CMRC for your portfolio, see our FREE research report to learn more.

GoDaddy (GDDY)

Market Cap: $12.03 billion

Known for its memorable Super Bowl commercials that put it on the map, GoDaddy (NYSE: GDDY) is a domain registrar and web services provider that helps entrepreneurs establish an online presence through domain registration, website building, hosting, and e-commerce tools.

Why Do We Pass on GDDY?

1. Offerings struggled to generate meaningful interest as its average billings growth of 5.5% over the last year did not impress
2. Estimated sales growth of 5.7% for the next 12 months implies demand will slow from its two-year trend
3. Gross margin of 63.6% reflects its relatively high servicing costs

GoDaddy’s stock price of $90.19 implies a valuation ratio of 2.4x forward price-to-sales. To fully understand why you should be careful with GDDY, check out our full research report (it’s free).

SoundHound AI (SOUN)

Market Cap: $3.34 billion

Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ: SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.

Why Does SOUN Fall Short?

1. Bad unit economics and steep infrastructure costs are reflected in its gross margin of 42.4%, one of the worst among software companies
2. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
3. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

At $7.94 per share, SoundHound AI trades at 15x forward price-to-sales. Read our free research report to see why you should think twice about including SOUN in your portfolio.

Stocks We Like More

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