3 software stocks that worry us

Software quickly reduces operating costs for companies. This secular theme makes SaaS companies attractive investment candidates, but it also comes with higher valuations that cause volatility. Unfortunately, rich prices have come back to haunt them over the past six months as the sector is down 24.1%. This decline was noticeably worse than the S&P 500’s 2.8% decline.

While some may be able to back their premium valuations with superior earnings growth, the odds aren’t great for the companies we analyze today. In that regard, there are three software stocks that could be in trouble.

Market cap: $16.77 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 should you sell AKAM?

1. Customers had doubts about their commitment to the platform last year, as the average invoice growth of 4.6% was disappointing

2. The gross margin of 58.9% is well below that of the competition, leaving less money to invest in areas such as marketing and R&D

3. Customer acquisition costs take time to be recouped, making it difficult to justify sales and marketing investments that could increase revenue

At $115.86 per share, Akamai Technologies trades at a forward price of 3.8x to sales. If you’re considering AKAM for your portfolio, check out our FREE research report to learn more.

Market cap: $1.95 billion

With a tech stack that powers everything from check-in to check-out at some of the world’s top hospitality venues, Agilysys (NASDAQ:AGYS) develops and delivers cloud-based and on-premises software solutions for hotels, resorts, casinos and restaurants to manage operations and improve guest experiences.

Why do we think twice about AGYS?

1. Annual revenue growth of 17.2% over the past five years was below our standards for the software industry

2. The gross margin of 61.7% reflects the relatively high service costs

3. Operating margin increased 3.6 percentage points over the past year as it scaled and became more efficient

Agilysys’ share price of $69.62 implies a valuation ratio of 5.8x forward price-to-sales. Dive into our free research report and discover why there are better opportunities than AGYS.

Market cap: $2.91 billion

Global Business Travel Group (NYSE:GBTG), originally spun off from American Express in 2014 but retaining the Amex GBT brand, provides end-to-end business travel and expense management solutions, connecting business customers to travel suppliers and offering specialized software services.

Why do we stay away from GBTG?

1. Annual revenue growth of 8.9% over the past two years was well below our standards for the software industry

2. The gross margin of 60.1% reflects the relatively high service costs

3. Its operating margin has not changed over the past year, showing that it was unable to increase its efficiency

American Express Global Business Travel trades at $5.54 per share, or 0.9x forward price-to-sales. To fully understand why you should be careful with GBTG, check out our full research report (it’s free).

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