Software is eating the world, and virtually no business is left untouched by it. 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 21.5% over the last six months. This drawdown is a stark contrast from the S&P 500’s 4.8% gain.
However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. Keeping that in mind, here is one software stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Software Stocks to Sell:
Zoom (ZM)
Market Cap: $27.09 billion
Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ:ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.
Why Is ZM Risky?
- Average billings growth of 4% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 98% net revenue retention rate
- Projected sales growth of 4.2% for the next 12 months suggests sluggish demand
Zoom is trading at $90.95 per share, or 5.4x forward price-to-sales. To fully understand why you should be careful with ZM, check out our full research report (it’s free).
8x8 (EGHT)
Market Cap: $281.4 million
Named after its founding year (1987) with "8x8" representing binary code for communications, 8x8 (NASDAQ:EGHT) provides cloud-based contact center and unified communications solutions that enable businesses to manage customer interactions and internal communications through a single platform.
Why Do We Pass on EGHT?
- Products, pricing, or go-to-market strategy may need some adjustments as its 2.4% average billings growth over the last year was weak
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- Operating margin increased by 2.1 percentage points over the last year as it refined its cost structure
At $2.02 per share, 8x8 trades at 0.4x forward price-to-sales. Check out our free in-depth research report to learn more about why EGHT doesn’t pass our bar.
One Software Stock to Buy:
Palantir Technologies (PLTR)
Market Cap: $365 billion
Named after the all-seeing stones in "Lord of the Rings," Palantir Technologies (NASDAQ:PLTR) develops software platforms that help government agencies and enterprises integrate, analyze, and operationalize their data for decision-making.
Why Are We Backing PLTR?
- Average billings growth of 59.5% over the last year enhances its liquidity and shows there is steady demand for its products
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
- Robust free cash flow margin of 50.7% gives it many options for capital deployment
Palantir Technologies’s stock price of $150.95 implies a valuation ratio of 51.6x forward price-to-sales. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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