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 cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 7.1%. This performance is a far cry from the S&P 500’s 11% ascent.
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. 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:
Unity (U)
Market Cap: $12.76 billion
Powering over half of the world's mobile games and expanding into industries from automotive to architecture, Unity (NYSE:U) provides software tools and services that allow developers to create, run, and monetize interactive 2D and 3D content across multiple platforms.
Why Should You Sell U?
- Average billings growth of 8.7% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 13.8% for the next 12 months is soft and implies weaker demand
- Operating profits fell over the last year as its sales dropped and it struggled to adjust its fixed costs
Unity is trading at $28.64 per share, or 6.1x forward price-to-sales. Check out our free in-depth research report to learn more about why U doesn’t pass our bar.
PagerDuty (PD)
Market Cap: $717.2 million
Born from the frustration of developers being woken up by unprioritized alerts, PagerDuty (NYSE:PD) is a digital operations management platform that helps organizations detect and respond to IT incidents, outages, and other critical issues in real-time.
Why Do We Steer Clear of PD?
- Offerings struggled to generate meaningful interest as its average billings growth of 1.1% over the last year did not impress
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 5.7 percentage points over the next year
PagerDuty’s stock price of $9.21 implies a valuation ratio of 1.6x forward price-to-sales. To fully understand why you should be careful with PD, check out our full research report (it’s free).
One Software Stock to Watch:
HubSpot (HUBS)
Market Cap: $11.39 billion
Born from the idea that traditional interruptive marketing was becoming less effective, HubSpot (NYSE:HUBS) provides an integrated platform that helps businesses attract, engage, and manage customer relationships through marketing, sales, service, and content management tools.
Why Do We Like HUBS?
- Average billings growth of 22.3% over the last year enhances its liquidity and shows there is steady demand for its products
- Superior software functionality and low servicing costs result in a premier gross margin of 83.7%
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
At $214.01 per share, HubSpot trades at 3.3x 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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