Software is rapidly reducing operating expenses for businesses. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that make re-ratings harder. Unfortunately, the rich prices have held them back over the past six months as the industry’s gain of 10.1% has fallen short of the S&P 500’s 16.2% rise.
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. With that said, here are two software stocks boasting durable advantages and one that may face trouble.
One Software Stock to Sell:
Box (BOX)
Market Cap: $4.70 billion
Known as the "Content Cloud" for managing the 90% of business data that exists as unstructured files and documents, Box (NYSE: BOX) provides a cloud-based platform that enables organizations to securely manage, share, and collaborate on their content from anywhere on any device.
Why Do We Think Twice About BOX?
- Average billings growth of 10% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 7.9% for the next 12 months is soft and implies weaker demand
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
Box’s stock price of $32.18 implies a valuation ratio of 4x forward price-to-sales. Check out our free in-depth research report to learn more about why BOX doesn’t pass our bar.
Two Software Stocks to Watch:
MongoDB (MDB)
Market Cap: $26.33 billion
Named after "humongous database," reflecting its ability to handle massive data loads, MongoDB (NASDAQ: MDB) provides a flexible document-based database platform that helps developers build, deploy, and maintain modern applications more efficiently.
Why Do We Like MDB?
- Annual revenue growth of 34.6% over the past five years was outstanding, reflecting market share gains
- ARR growth averaged 25.2% over the last year, showing customers are willing to take multi-year bets on its software
At $323.75 per share, MongoDB trades at 10.3x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.
Doximity (DOCS)
Market Cap: $13.58 billion
With over 80% of U.S. physicians as members of its digital community, Doximity (NYSE: DOCS) operates a digital platform that enables physicians and other healthcare professionals to collaborate, stay current with medical news, manage their careers, and conduct virtual patient visits.
Why Will DOCS Beat the Market?
- Billings have averaged 19.8% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
- Strong free cash flow margin of 48.7% enables it to reinvest or return capital consistently
Doximity is trading at $72.60 per share, or 22.5x forward price-to-sales. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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