Software is eating the world, and virtually no company is unaffected by it. 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 has been flat over the past six months, lagging the S&P 500’s 13.6% gain.
A cautious approach is imperative when dealing with these companies, as their valuations could plummet if AI disrupts their earnings potential. On that note, here are three software stocks we’re swiping left on.
Market cap: $3.46 billion
Born from founders’ frustration with the inefficiencies of email-based collaboration on Facebook, Asana (NYSE:ASAN) offers a work management platform that allows organizations to track projects, set goals and manage workflows in a centralized digital workspace.
Why do we stay away from ASAN?
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Customers had doubts about their commitment to the platform last year, as the average invoice growth of 9.3% was disappointing
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The net revenue retention rate of 95.7% shows that it is difficult to retain customers
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The software platform has complicated integration requirements for its enterprise customers, causing long sales cycles that limit the number of new customers
At $14.58 per share, Asana trades at a price-to-sales ratio of 4.3x. To fully understand why you should be careful with ASAN, check out our full research report (it’s free for active Edge members).
Market cap: $4.66 billion
With a platform that powers digital services to approximately 25 million account holders across America, Q2 Holdings (NYSE:QTWO) provides cloud-based digital solutions that help financial institutions, fintechs and alternative finance companies deliver modern banking experiences to their customers.
Why are we careful with QTWO?
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ARR growth averaged a weak 11.3% last year, suggesting competition is taking some attention away from software
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The estimated 10.7% sales growth for the next twelve months implies that demand will slow from the two-year trend
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Poor economic conditions and high infrastructure costs are reflected in the gross margin of 53.4%, one of the worst among software companies
Q2 Holdings trades at $74.54 per share, or 6.1x forward price/sales. If you’re considering QTWO for your portfolio, check out our FREE research report to learn more.
Market cap: $22.46 billion
As the silent guardian of the Internet’s roadmap, VeriSign (NASDAQ:VRSN) operates the authoritative registry for .com and .net domain names, ensuring websites can be reliably found when users type web addresses.
Why does VRSN fall short?
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Modest annual revenue growth of 4.8% over the past two years shows demand lagging behind software competitors
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The estimated revenue growth of 4.9% for the next twelve months is weak and implies weaker demand
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Operating margin has remained unchanged over the past year, indicating the company has failed to influence its fixed costs
VeriSign’s stock price of $242.33 implies a valuation ratio of 13.3x forward price-to-sales. Dive into our free research report and find out why there are better opportunities than VRSN.
If the success of your portfolio depends on just four stocks, your wealth is built on fragile ground. You have a small window to secure high quality assets before the market expands and these prices disappear.
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