From commerce to culture: software digitizes every aspect of our lives. Companies that bring this to life have been rewarded with high valuation multiples that make fundraising easier, but they have capped their returns lately as the sector’s six-month gain of 15.3% lagged the S&P 500’s 22.9%.
A cautious approach is imperative when venturing into these businesses, as the best will deliver robust profit growth while the rest will be disrupted by competition and AI. That said, here’s one resilient software file at the top of our wish list and two where we swipe left.
Market capitalization: $10.7 billion
With a massive distributed network spanning more than 4,100 points of presence in nearly 130 countries, Akamai Technologies (NASDAQ:AKAM) offers a globally distributed cloud platform that helps companies deliver, secure and optimize their digital experiences online.
Why do we think AKAM will underperform?
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Its 5.6% annual revenue growth over the past two years was slower than its software peers
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Poor economic conditions and high infrastructure costs are reflected in the gross margin of 59.1%, one of the worst among software companies
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Long payback periods on sales and marketing costs limit customer growth and indicate that the company operates in a highly competitive environment
At $74.50 per share, Akamai Technologies trades at a forward price-to-sales of 2.5x. Read our free research report to see why you should think twice about including AKAM in your portfolio. It’s free for active Edge members.
Market cap: $11.04 billion
With a mission to build software for the people who build the world, Procore Technologies (NYSE:PCOR) provides cloud-based software that allows owners, contractors and other stakeholders to collaborate and manage construction projects from any device.
Why are we cautious about PCOR?
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Products, pricing or go-to-market strategies may need some adjustments as average bill growth of 13.7% has been weak over the past year
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The operating margin fell by 2.3 percentage points last year as a result of the increase in scale
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The low free cash flow margin of 6.5% over the past year gives the company little breathing room, limiting its ability to self-finance growth or return capital to shareholders
Procore Technologies’ stock price of $73.49 implies a valuation ratio of 8x forward price-to-sales. To fully understand why you should be careful with PCOR, check out our full research report (it’s free for active Edge members).
Market capitalization: $10.12 billion
With its colorful interface of boards, columns and automation that has replaced the chaos of spreadsheets, monday.com (NASDAQ:MNDY) is a cloud-based work operating system that helps teams manage projects, track tasks and streamline workflows through customizable interfaces.
Why do we support MNDY?
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Last year’s ARR trends show that the company maintains a steady stream of long-term contracts that contribute positively to revenue predictability
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Market share is likely to increase over the next twelve months as expected revenue growth of 23.6% is robust
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Superior software functionality and low service costs result in a best-in-class gross margin of 89.4%
monday.com trades at $196.99 per share, or 7.7x forward price-to-sales. Is now a good time to buy? Find out in our full research report. It’s free for active Edge members.
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