From commerce to culture, software is digitizing every aspect of our lives. Companies bringing it to life have been rewarded with explosive earnings growth, and the upward trend shows no signs of stopping - over the past six months, the industry has posted a gain of 9.3% while the S&P 500 was flat.
Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. Keeping that in mind, here is one resilient software stock at the top of our wish list and two we’re passing on.
Two Software Stocks to Sell:
Okta (OKTA)
Market Cap: $20.26 billion
Founded during the aftermath of the financial crisis in 2009, Okta (NASDAQ: OKTA) is a cloud-based software-as-a-service platform that helps companies manage identity for their employees and customers.
Why Does OKTA Give Us Pause?
- Estimated sales growth of 9.6% for the next 12 months implies demand will slow from its three-year trend
- Operating losses show it sacrificed profitability while scaling the business
- Free cash flow margin is forecasted to shrink by 4.1 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Okta’s stock price of $117 implies a valuation ratio of 7.2x forward price-to-sales. Check out our free in-depth research report to learn more about why OKTA doesn’t pass our bar.
C3.ai (AI)
Market Cap: $3.12 billion
Founded in 2009 by enterprise software veteran Tom Seibel, C3.ai (NYSE: AI) provides software that makes it easy for organizations to add artificial intelligence technology to their applications.
Why Are We Wary of AI?
- Revenue increased by 16.4% annually over the last three years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Sky-high servicing costs result in an inferior gross margin of 59.9% that must be offset through increased usage
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
At $23.35 per share, C3.ai trades at 6.9x forward price-to-sales. Read our free research report to see why you should think twice about including AI in your portfolio.
One Software Stock to Buy:
Semrush (SEMR)
Market Cap: $1.46 billion
Started by Oleg Shchegolev while still in university, Semrush (NYSE: SEMR) is a software-as-a-service platform that helps companies optimize their search engine and content marketing efforts.
Why Are We Backing SEMR?
- Billings growth has averaged 23.2% over the last year, indicating a healthy pipeline of new contracts that should drive future revenue increases
- Sales outlook for the upcoming 12 months implies the business will stay on its desirable three-year growth trajectory
- Software is difficult to replicate at scale and leads to a stellar gross margin of 82.6%
Semrush is trading at $9.98 per share, or 3.3x forward price-to-sales. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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