From commerce to culture, software is digitizing every aspect of our lives. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that make re-ratings harder. Unfortunately, the rich prices have held them back over the past six months as the industry’s gain of 10.3% has fallen short of the S&P 500’s 21.3% rise.
Investors should tread carefully as only some businesses are worthy of their valuations, and luckily for you, we started StockStory to help you find them. Keeping that in mind, here are two software stocks we think can generate sustainable market-beating returns and one best left ignored.
One Software Stock to Sell:
PubMatic (PUBM)
Market Cap: $368.5 million
Powering billions of daily ad impressions across the open internet, PubMatic (NASDAQ: PUBM) operates a technology platform that helps publishers maximize revenue from their digital advertising inventory while giving advertisers more control and transparency.
Why Do We Steer Clear of PUBM?
- Customers generally do not adopt complementary products as its 110% net revenue retention rate lags behind the industry standard
- Estimated sales decline of 8.7% for the next 12 months implies a challenging demand environment
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 5 percentage points
PubMatic’s stock price of $8.03 implies a valuation ratio of 1.4x forward price-to-sales. Read our free research report to see why you should think twice about including PUBM in your portfolio.
Two Software Stocks to Watch:
Cloudflare (NET)
Market Cap: $80.04 billion
With a massive network spanning more than 310 cities in over 120 countries, Cloudflare (NYSE: NET) provides a global network that delivers security, performance and reliability services to protect websites, applications, and corporate networks.
Why Will NET Outperform?
- Billings have averaged 34.2% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
- Market share will likely rise over the next 12 months as its expected revenue growth of 27.5% is robust
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
At $228.98 per share, Cloudflare trades at 31.1x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free for active Edge members.
SentinelOne (S)
Market Cap: $5.62 billion
Built on the principle of "fighting machine with machine," SentinelOne (NYSE: S) provides an AI-powered cybersecurity platform that autonomously prevents, detects, and responds to threats across endpoints, cloud workloads, and identity systems.
Why Are We Positive On S?
- ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
- Projected revenue growth of 21.3% for the next 12 months suggests its momentum from the last two years will persist
- Gross margin of 75% is reasonable for the industry and allows for steady investments in marketing and R&D
SentinelOne is trading at $16.78 per share, or 5x forward price-to-sales. Is now a good time to buy? See for yourself in our in-depth research report, it’s free for active Edge members.
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