From commerce to culture, software is digitizing every aspect of our lives. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 7% over the past six months, outpacing the S&P 500’s 1% rise.
Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. Keeping that in mind, here are three software stocks that may face trouble.
Akamai (AKAM)
Market Cap: $12.65 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 Pass on AKAM?
- 4.9% annual revenue growth over the last three years was slower than its software peers
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 59.4%, one of the worst among software companies
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
Akamai’s stock price of $84.15 implies a valuation ratio of 3.1x forward price-to-sales. To fully understand why you should be careful with AKAM, check out our full research report (it’s free).
Olo (OLO)
Market Cap: $992.8 million
Founded by Noah Glass, who wanted to get a cup of coffee faster on his way to work, Olo (NYSE:OLO) provides restaurants and food retailers with software to manage food orders and delivery.
Why Are We Hesitant About OLO?
- Gross margin of 54.9% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Historical operating losses show it had an inefficient cost structure while scaling
- Free cash flow margin is expected to remain in place over the coming year
At $5.83 per share, Olo trades at 2.9x forward price-to-sales. Read our free research report to see why you should think twice about including OLO in your portfolio.
Upland (UPLD)
Market Cap: $73.82 million
Founder Jack McDonald’s second software rollup, Upland Software (NASDAQ:UPLD) is a one stop shop for sales and marketing software, project management, HR, and contact center services for small and medium sized businesses.
Why Does UPLD Worry Us?
- Annual sales declines of 2.9% for the past three years show its products and services struggled to connect with the market
- Projected sales decline of 3.8% over the next 12 months indicates demand will continue deteriorating
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
Upland is trading at $2.67 per share, or 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why UPLD doesn’t pass our bar.
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