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 9.8% over the last six months. This performance is a noticeable divergence from the S&P 500’s 8.4% 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. Taking that into account, here is one software stock poised to generate sustainable market-beating returns and two we’re swiping left on.
Two Software Stocks to Sell:
UiPath (PATH)
Market Cap: $5.52 billion
Starting with robotic process automation (RPA) and evolving into a comprehensive automation powerhouse, UiPath (NYSE: PATH) provides an AI-powered business automation platform that enables organizations to create software robots that mimic human actions to streamline repetitive tasks and processes.
Why Are We Cautious About PATH?
- Revenue increased by 11.2% annually over the last two years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Products, pricing, or go-to-market strategy may need some adjustments as its 9.3% average billings growth over the last year was weak
- Estimated sales growth of 8.2% for the next 12 months implies demand will slow from its two-year trend
UiPath’s stock price of $10.54 implies a valuation ratio of 3.1x forward price-to-sales. To fully understand why you should be careful with PATH, check out our full research report (it’s free).
F5 (FFIV)
Market Cap: $22.22 billion
Originally named after the F5 tornado, the most powerful on the meteorological scale, F5 (NASDAQ: FFIV) provides security and delivery solutions that protect applications across cloud, data center, and edge environments for large organizations.
Why Does FFIV Fall Short?
- ARR growth averaged a weak 3.3% over the last year, suggesting that competition is pulling some attention away from its software
- Estimated sales growth of 5.8% for the next 12 months implies demand will slow from its two-year trend
- Operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs
F5 is trading at $396.05 per share, or 6.6x forward price-to-sales. If you’re considering FFIV for your portfolio, see our FREE research report to learn more.
One Software Stock to Buy:
ServiceNow (NOW)
Market Cap: $106.3 billion
Built on a single code base that processes more than 80 billion workflows and 6.5 trillion transactions annually, ServiceNow (NYSE: NOW) provides a cloud-based platform that helps organizations automate and digitize workflows across departments, from IT and HR to customer service and security.
Why Do We Love NOW?
- Customers view its software as mission-critical to their operations as its ARR has averaged 21.8% growth over the last year
- 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 34.6% enables it to reinvest or return capital consistently
At $102.86 per share, ServiceNow trades at 6.3x 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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