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 14% over the last six months. This drawdown is a noticeable divergence from the S&P 500’s 6.4% return.
However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. Taking that into account, here is one resilient software stock at the top of our wish list and two we’re swiping left on.
Two Software Stocks to Sell:
Five9 (FIVN)
Market Cap: $1.79 billion
Taking its name from the "five nines" (99.999%) standard for optimal service reliability in telecommunications, Five9 (NASDAQ: FIVN) provides cloud-based software that enables businesses to run their contact centers with tools for customer service, sales, and marketing across multiple communication channels.
Why Is FIVN Risky?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 9.4% underwhelmed
- Estimated sales growth of 10.1% for the next 12 months implies demand will slow from its two-year trend
- Gross margin of 55.5% reflects its high servicing costs
Five9 is trading at $23.48 per share, or 1.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FIVN.
Sprinklr (CXM)
Market Cap: $1.34 billion
With a proprietary AI engine processing 450 million data points daily across 30+ digital channels, Sprinklr (NYSE: CXM) provides cloud-based software that helps large enterprises manage customer experiences across social, messaging, chat, and voice channels.
Why Do We Avoid CXM?
- Products, pricing, or go-to-market strategy may need some adjustments as its 6% average billings growth over the last year was weak
- Estimated sales growth of 1.5% for the next 12 months implies demand will slow from its two-year trend
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
Sprinklr’s stock price of $5.39 implies a valuation ratio of 1.5x forward price-to-sales. To fully understand why you should be careful with CXM, check out our full research report (it’s free).
One Software Stock to Watch:
Palo Alto Networks (PANW)
Market Cap: $149.7 billion
Founded in 2005 by security visionary Nir Zuk who sought to reimagine firewall technology, Palo Alto Networks (NASDAQ: PANW) provides AI-powered cybersecurity platforms that protect organizations' networks, clouds, and endpoints from sophisticated threats.
Why Are We Positive On PANW?
- Market share is on track to rise over the next 12 months as its 27.7% projected revenue growth implies demand will accelerate from its two-year trend
- User-friendly software enables clients to ramp up spending quickly, leading to the speedy recovery of customer acquisition costs
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $184.71 per share, Palo Alto Networks trades at 10.2x forward price-to-sales. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
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