From commerce to culture, software is digitizing every aspect of our lives. In the past, the undeniable tailwinds fueling SaaS companies led to lofty valuation multiples that made it easier to raise capital. But this was a double-edged sword as the high prices exposed them to big drawdowns, and unfortunately, the industry has tumbled by 3.2% over the last six months. This drawdown is a noticeable divergence from the S&P 500’s 10.9% return.
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. Keeping that in mind, here is one software stock boasting a durable advantage and two we’re passing on.
Two Software Stocks to Sell:
Salesforce (CRM)
Market Cap: $156.5 billion
With its cloud-based platform named after its stock ticker symbol CRM (Customer Relationship Management), Salesforce (NYSE: CRM) provides customer relationship management software that helps businesses connect with their customers across sales, service, marketing, and commerce.
Why Are We Hesitant About CRM?
- Products, pricing, or go-to-market strategy may need some adjustments as its 10.5% average billings growth over the last year was weak
- Projected sales growth of 10% for the next 12 months suggests sluggish demand
- Operating margin expanded by 1.1 percentage points over the last year as it scaled and became more efficient
Salesforce is trading at $192.92 per share, or 3.3x forward price-to-sales. Read our free research report to see why you should think twice about including CRM in your portfolio.
Pegasystems (PEGA)
Market Cap: $5.97 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 Do We Think PEGA Will Underperform?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 5.1% underwhelmed
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 6.3 percentage points
Pegasystems’s stock price of $35.65 implies a valuation ratio of 3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PEGA.
One Software Stock to Watch:
Cadence Design Systems (CDNS)
Market Cap: $103.4 billion
Powering the chips behind everything from smartphones to AI accelerators for over 35 years, Cadence Design Systems (NASDAQ: CDNS) provides essential computational software, hardware, and intellectual property used by engineers to design and verify advanced electronic systems and semiconductors.
Why Do We Watch CDNS?
- Superior software functionality and low servicing costs result in a best-in-class gross margin of 87.1%
- User-friendly software enables clients to ramp up spending quickly, leading to the speedy recovery of customer acquisition costs
- Strong free cash flow margin of 25.9% enables it to reinvest or return capital consistently
At $373.43 per share, Cadence Design Systems trades at 16.1x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
ONE MORE THING: Top 5 Growth Stocks. The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively.
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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.
