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 13.3% gain.
Investors should proceed with caution as only a few companies are worth their valuations as AI and competition will market many products. In that regard, there are three software stocks that could be in trouble.
Market cap: $168.3 million
Based on the Health Catalyst Flywheel methodology that emphasizes measurable results, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and achieve measurable clinical, financial and operational improvements.
Why should you sell HCAT?
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Annual revenue growth of 4.4% over the past two years was well below our standards for the software sector
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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
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The negative free cash flow raises questions about the return on its investments
At $2.39 per share, Health Catalyst trades at a forward price-to-sales of 0.6x. To fully understand why you should be careful with HCAT, check out our full research report (it’s free for active Edge members).
Market capitalization: $5.00 billion
Originally developed to address the growing complexity of IT security in the cloud era, Qualys (NASDAQ:QLYS) offers a cloud-based platform that helps organizations identify, manage and protect their IT assets against cyber threats across on-premises, cloud and mobile environments.
Why are we wary of QLYS?
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Customers were hesitant to make long-term commitments to the software as average ARR growth of 10.1% over the past year was slow
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The estimated 8.1% sales growth for the next twelve months implies that demand will slow from the two-year trend
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Corporate profits have increased over the past year as the company gained some control over its fixed costs and became more efficient
Qualys trades at $139.64 per share, or 7.2x forward price/sales. To learn more about why QLYS doesn’t meet our bar, check out our free in-depth research report.
Market cap: $1.77 billion
Born from a need to understand the complex digital marketing landscape, Semrush (NYSE:SEMR) is a software-as-a-service platform that helps businesses improve their online visibility, analyze digital marketing efforts, and optimize content across search engines and social media.
