Software is rapidly reducing operating expenses for businesses. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 10.3% over the past six months. Investing here would have been wise - at the same time, the S&P 500 was flat.

Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. Taking that into account, here are three software stocks best left ignored.

Five9 (FIVN)

Market Cap: $2.34 billion

Started in 2001, Five9 (NASDAQ: FIVN) offers software-as-a-service that makes it easier for companies to set up and efficiently run call centers to offer more tailored customer support.

Why Does FIVN Give Us Pause?

1. Annual revenue growth of 19.6% over the last three years was below our standards for the software sector
2. Sky-high servicing costs result in an inferior gross margin of 54.4% that must be offset through increased usage
3. Historical operating losses point to an inefficient cost structure

Five9 is trading at $30.96 per share, or 2.4x forward price-to-sales. To fully understand why you should be careful with FIVN, check out our full research report (it’s free).

Upstart (UPST)

Market Cap: $5.17 billion

Founded by the former head of Google's enterprise business, Upstart (NASDAQ: UPST) is an AI-powered lending platform facilitating loans for banks and consumers.

Why Are We Hesitant About UPST?

1. Products and services have few die-hard fans as sales have declined by 9.1% annually over the last three years
2. Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
3. 182× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Upstart’s stock price of $55.25 implies a valuation ratio of 5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than UPST.

Bentley (BSY)

Market Cap: $13.47 billion

Founded by brothers Keith and Barry Bentley, Bentley Systems (NASDAQ: BSY) offers a software-as-a-service platform that addresses the lifecycle of infrastructure projects such as road networks, tunnel systems, and wastewater facilities.

Why Does BSY Fall Short?

1. Offerings struggled to generate meaningful interest as its average billings growth of 7.5% over the last year did not impress
2. Estimated sales growth of 9.3% for the next 12 months implies demand will slow from its three-year trend
3. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.6 percentage points

At $42.66 per share, Bentley trades at 9.6x forward price-to-sales. To fully understand why you should be careful with BSY, check out our full research report (it’s free).

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