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 capped returns lately as the industry’s six-month gain of 3% has trailed the S&P 500’s 16.9%.

A cautious approach is imperative when dabbling in these businesses as the best will deliver robust earnings growth while the rest will be disrupted by competition and AI. Taking that into account, here is one software stock poised to generate sustainable market-beating returns and two we’re steering clear of.

Two Software Stocks to Sell:

Twilio (TWLO)

Market Cap: $19.8 billion

Known for the clever "Twilio Magic" demo that had developers creating functioning communications apps in minutes, Twilio (NYSE: TWLO) provides a platform that enables businesses to communicate with their customers through voice, messaging, email, and other digital channels.

Why Does TWLO Fall Short?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 13.5% underwhelmed
2. Estimated sales growth of 9.3% for the next 12 months is soft and implies weaker demand
3. Gross margin of 49.4% reflects its high servicing costs

Twilio’s stock price of $130.68 implies a valuation ratio of 3.9x forward price-to-sales. If you’re considering TWLO for your portfolio, see our FREE research report to learn more.

Workday (WDAY)

Market Cap: $60.87 billion

Born from the vision of PeopleSoft founders after Oracle's hostile takeover of their previous company, Workday (NASDAQ: WDAY) provides cloud-based software for financial management, human resources, planning, and analytics to help organizations manage their business operations.

Why Are We Wary of WDAY?

1. Products, pricing, or go-to-market strategy may need some adjustments as its 13.7% average billings growth over the last year was weak
2. Estimated sales growth of 12.8% for the next 12 months implies demand will slow from its two-year trend
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

At $227 per share, Workday trades at 6.1x forward price-to-sales. Check out our free in-depth research report to learn more about why WDAY doesn’t pass our bar.

One Software Stock to Watch:

Confluent (CFLT)

Market Cap: $8.23 billion

Built by the original creators of Apache Kafka, the popular open-source messaging system, Confluent (NASDAQ: CFLT) provides a data infrastructure platform that enables organizations to connect their applications, systems, and data layers around real-time data streams.

Why Do We Like CFLT?

1. Winning new contracts that can potentially increase in value as its billings growth has averaged 26.1% over the last year
2. Estimated revenue growth of 16.7% for the next 12 months implies its momentum over the last two years will continue
3. Adequate gross margin of 74.1% gives it sufficient room to spend on marketing and product development

Confluent is trading at $23.61 per share, or 6.3x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free for active Edge members.

Stocks We Like Even More

Trump’s April 2025 tariff bombshell triggered a massive market selloff, but stocks have since staged an impressive recovery, leaving those who panic sold on the sidelines.

Take advantage of the rebound by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today

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