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 20.7% over the past six months. This performance is a far cry from the S&P 500’s 4.8% 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. With that said, here are two resilient software stocks at the top of our wish list and one we’re steering clear of.
One Software Stock to Sell:
Pegasystems (PEGA)
Market Cap: $7.99 billion
With a "Center-out Business Architecture" approach that transcends organizational silos, Pegasystems (NASDAQ: PEGA) develops software that helps organizations automate workflows and use artificial intelligence to improve customer experiences and business processes.
Why Are We Wary of PEGA?
- Annual revenue growth of 11.4% over the last five years was below our standards for the software sector
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Operating margin expanded by 6.8 percentage points over the last year as it scaled and became more efficient
Pegasystems is trading at $47.11 per share, or 4.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PEGA.
Two Software Stocks to Watch:
Zscaler (ZS)
Market Cap: $26.38 billion
Pioneering the "zero trust" approach that has fundamentally changed enterprise network security, Zscaler (NASDAQ: ZS) provides a cloud-based security platform that connects users, devices, and applications securely without traditional network-based security hardware.
Why Will ZS Beat the Market?
- Average billings growth of 24.3% over the last year enhances its liquidity and shows there is steady demand for its products
- Sales outlook for the upcoming 12 months implies the business will stay on its desirable two-year growth trajectory
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $163.91 per share, Zscaler trades at 7.1x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
Dynatrace (DT)
Market Cap: $11.72 billion
With its platform processing over 30 trillion pieces of IT performance data daily, Dynatrace (NYSE: DT) provides an AI-powered platform that helps organizations monitor, secure, and optimize their applications and IT infrastructure across cloud environments.
Why Are We Fans of DT?
- Winning new contracts that can potentially increase in value as its billings growth has averaged 22.5% over the last year
- Prominent and differentiated software leads to a top-tier gross margin of 81.7%
- DT is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Dynatrace’s stock price of $38.73 implies a valuation ratio of 5.3x forward price-to-sales. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 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.
