Software is eating the world, and virtually no business is left untouched by it. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 47.2% over the past six months, outpacing the S&P 500’s 21.4% rise.
Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. With that said, here are three software stocks best left ignored.
Paychex (PAYX)
Market Cap: $36.09 billion
Once known as the go-to service for small business payroll needs, Paychex (NASDAQ: PAYX) provides payroll processing, HR services, employee benefits administration, and insurance solutions to small and medium-sized businesses.
Why Does PAYX Fall Short?
- Muted 9.4% annual revenue growth over the last five years shows its demand lagged behind its software peers
- Estimated sales growth of 5.3% for the next 12 months implies demand will slow from its two-year trend
- Operating margin improvement of 1.2 percentage points over the last year demonstrates its ability to scale efficiently
Paychex’s stock price of $101.39 implies a valuation ratio of 5.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PAYX.
nCino (NCNO)
Market Cap: $2.05 billion
Born from the internal technology needs of a community bank in 2011, nCino (NASDAQ: NCNO) provides cloud-based software that helps financial institutions streamline client onboarding, loan origination, and account opening processes.
Why Are We Hesitant About NCNO?
- Products, pricing, or go-to-market strategy may need some adjustments as its 9.6% average billings growth over the last year was weak
- Estimated sales growth of 7.9% for the next 12 months implies demand will slow from its two-year trend
- Gross margin of 62.2% is below its competitors, leaving less money to invest in areas like marketing and R&D
nCino is trading at $19.41 per share, or 3.1x forward price-to-sales. Check out our free in-depth research report to learn more about why NCNO doesn’t pass our bar.
Health Catalyst (HCAT)
Market Cap: $130.9 million
Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ: HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.
Why Are We Bearish on HCAT?
- Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 14.4% declines over the last year
- Gross margin of 51.2% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
At $1.73 per share, Health Catalyst trades at 0.6x forward price-to-sales. Read our free research report to see why you should think twice about including HCAT in your portfolio.
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