Software is rapidly reducing operating expenses for businesses. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 10.4%. This drop is a stark contrast from the S&P 500’s 10.9% gain.

While some can support their premium valuations with superior earnings growth, the odds aren’t great for the businesses we’re analyzing today. On that note, here are three software stocks that may face trouble.

Commerce (CMRC)

Market Cap: $221.1 million

As a founding member of the MACH Alliance advocating for modern tech standards, Commerce (NASDAQ: CMRC) provides a SaaS platform that enables businesses to build and manage online stores, connect with marketplaces, and integrate with point-of-sale systems.

Why Do We Steer Clear of CMRC?

1. Underwhelming ARR growth of 2.5% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
2. Projected sales growth of 3.3% for the next 12 months suggests sluggish demand
3. Free cash flow margin is forecasted to shrink by 3.2 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors

Commerce’s stock price of $2.80 implies a valuation ratio of 0.6x forward price-to-sales. Check out our free in-depth research report to learn more about why CMRC doesn’t pass our bar.

Health Catalyst (HCAT)

Market Cap: $121.2 million

Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ: HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.

Why Do We Pass on HCAT?

1. Flat billings over the last year suggest it may need to improve its products, pricing, or go-to-market strategy to reinvigorate demand
2. Bad unit economics and steep infrastructure costs are reflected in its gross margin of 50.4%, one of the worst among software companies
3. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment

Health Catalyst is trading at $1.77 per share, or 0.5x forward price-to-sales. If you’re considering HCAT for your portfolio, see our FREE research report to learn more.

Teradata (TDC)

Market Cap: $3.09 billion

Pioneering data warehousing technology in the 1980s before "big data" was a common term, Teradata (NYSE: TDC) provides cloud-based data analytics and AI platforms that help large enterprises integrate, analyze, and leverage their data across multiple environments.

Why Should You Sell TDC?

1. Offerings struggled to generate meaningful interest as its average billings growth of 3.7% over the last year did not impress
2. Inability to adjust its cost structure while its revenue declined over the last year led to a 7.2 percentage point drop in the company’s operating margin
3. Projected 20.2 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

At $31.75 per share, Teradata trades at 1.9x forward price-to-sales. To fully understand why you should be careful with TDC, check out our full research report (it’s free).

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