2 Reasons to Avoid NCNO and 1 Stock to Buy Instead

February 25, 2025 at 14:53 PM EST

NCNO Cover Image

Over the last six months, nCino’s shares have sunk to $31.47, producing a disappointing 9.2% loss - a stark contrast to the S&P 500’s 6.1% gain. This might have investors contemplating their next move.

Is now the time to buy nCino, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even with the cheaper entry price, we don't have much confidence in nCino. Here are two reasons why you should be careful with NCNO and a stock we'd rather own.

Why Is nCino Not Exciting?

Founded in 2011 in North Carolina, nCino (NASDAQ: NCNO) makes cloud-based operating systems for banks and provides that software-as-a-service.

1. Low Gross Margin Reveals Weak Structural Profitability

For software companies like nCino, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

nCino’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.2% gross margin over the last year. That means nCino paid its providers a lot of money ($39.78 for every $100 in revenue) to run its business.

2. Operating Losses Sound the Alarms

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Although nCino broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if nCino reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Final Judgment

nCino isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 6.1× forward price-to-sales (or $31.47 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of nCino

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