Software is rapidly reducing operating expenses for businesses. 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 12.3% over the past six months. This drop is a noticeable divergence from the S&P 500’s 5.5% return.

However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. On that note, here is one software stock boasting a durable advantage and two we’re steering clear of.

Two Software Stocks to Sell:

Akamai (AKAM)

Market Cap: $10.65 billion

Founded in 1999 by two engineers from MIT, Akamai (NASDAQ: AKAM) provides software for organizations to efficiently deliver web content to their customers.

Why Do We Think AKAM Will Underperform?

1. Sales trends were unexciting over the last three years as its 4.6% annual growth was well below the typical software company
2. Sky-high servicing costs result in an inferior gross margin of 59.1% that must be offset through increased usage
3. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions

Akamai’s stock price of $74.79 implies a valuation ratio of 2.5x forward price-to-sales. Read our free research report to see why you should think twice about including AKAM in your portfolio.

Palo Alto Networks (PANW)

Market Cap: $115.9 billion

Founded in 2005 by cybersecurity engineer Nir Zuk, Palo Alto Networks (NASDAQ: PANW) makes hardware and software cybersecurity products that protect companies from cyberattacks, breaches, and malware threats.

Why Are We Hesitant About PANW?

1. Annual revenue growth of 19.7% over the last three years was below our standards for the software sector
2. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 3% underwhelmed

Palo Alto Networks is trading at $173.75 per share, or 12.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PANW.

One Software Stock to Watch:

SentinelOne (S)

Market Cap: $5.49 billion

With roots in the Israeli cyber intelligence community, SentinelOne (NYSE: S) provides software to help organizations efficiently detect, prevent, and investigate cyber attacks.

Why Are We Positive On S?

1. ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
2. Projected revenue growth of 21.3% for the next 12 months suggests its momentum from the last three years will persist
3. Free cash flow margin is forecasted to grow by 7 percentage points in the coming year, potentially giving the company more chips to play with

At $16.68 per share, SentinelOne trades at 5.2x forward price-to-sales. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.

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