Software is eating the world, and virtually no business is left untouched by it. 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 9.1% over the past six months. This performance is a far cry from the S&P 500’s 4.5% ascent.

Investors should tread carefully as only some businesses are worthy of their valuations, and luckily for you, we started StockStory to help you find them. Keeping that in mind, here is one software stock poised to generate sustainable market-beating returns and two we’re passing on.

Two Software Stocks to Sell:

ZoomInfo (ZI)

Market Cap: $3.50 billion

Founded in 2007 as DiscoveryOrg and renamed after a merger in 2019, ZoomInfo (NASDAQ: ZI) is a software as a service product that provides sales departments with access to a database of prospective clients.

Why Do We Pass on ZI?

1. Billings didn’t grow over the last year, suggesting the company struggled to sell its software and might have to lower prices to stimulate growth
2. Software platform has intricate integration requirements for its enterprise clients, triggering long sales cycles that limit new customer additions
3. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 10.3 percentage points

ZoomInfo’s stock price of $10.28 implies a valuation ratio of 2.9x forward price-to-sales. Read our free research report to see why you should think twice about including ZI in your portfolio.

Guidewire (GWRE)

Market Cap: $19.04 billion

Founded by two individuals involved in the development of leading procurement software Ariba, Guidewire (NYSE: GWRE) offers insurance companies a software-as-a-service platform to help sell their products and manage their workflows.

Why Are We Cautious About GWRE?

1. Sales trends were unexciting over the last three years as its 12.6% annual growth was below the typical software company
2. High servicing costs result in a relatively inferior gross margin of 61.9% that must be offset through increased usage

At $226.19 per share, Guidewire trades at 14.9x forward price-to-sales. Check out our free in-depth research report to learn more about why GWRE doesn’t pass our bar.

One Software Stock to Watch:

Commvault Systems (CVLT)

Market Cap: $8.29 billion

Originally formed in 1988 as part of Bell Labs, Commvault (NASDAQ: CVLT) provides enterprise software used for data backup and recovery, cloud and infrastructure management, retention, and compliance.

Why Are We Positive On CVLT?

1. Billings have averaged 26.5% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
2. Superior software functionality and low servicing costs are reflected in its top-tier gross margin of 82%
3. Disciplined cost controls and effective management resulted in a strong trailing 12-month operating margin of 7.6%

Commvault Systems is trading at $186.50 per share, or 7.1x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.

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