1 Software stock for long-term investors and 2 We brush off

Software quickly reduces operating costs for companies. In the past, the undeniable tailwinds fueling SaaS companies led to lofty valuation multiples that made it easier to raise capital. But this was a double-edged sword, as the high prices exposed them to large price drops, and unfortunately the sector has plunged 25.1% in the last six months. This drop was seriously disheartening as the S&P 500 remained flat.

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, there’s one software stock poised to generate sustainable, market-beating returns, and two we’re avoiding.

Market cap: $5.97 billion

Operating in a field where companies have traditionally juggled multiple disconnected systems, Paylocity (NASDAQ:PCTY) offers cloud-based human capital management and payroll software solutions that help companies manage their workforce and HR processes.

Why are we careful with PCTY?

1. The disappointing 13% ARR growth over the past year suggests the company faced challenges in acquiring and retaining long-term customers

2. The estimated 7% sales growth for the next twelve months implies that demand will slow from the two-year trend

3. Operating margin increased 1.4 percentage points over the past year as it scaled and became more efficient

At $110.91 per share, Paylocity trades at a forward price-to-sales of 3.3x. Dive into our free research report and find out why there are better opportunities than PCTY.

Market cap: $1.63 billion

Using advanced analytics to evaluate more than 17 billion digital advertising transactions every day, DoubleVerify (NYSE:DV) provides AI-powered technology that verifies that digital advertising is viewable, fraud-free, brand-appropriate, and served in the targeted geographic location.

Why does DV fall short?

1. Revenue has grown 14.3% annually over the past two years, which is absolutely acceptable, but tepid for a software company enjoying a tailwind

2. A competitive market means the company must spend more on sales and marketing to stand out, even if the return on investment is low

3. Costs have risen faster than revenues over the past year, causing operating margin to decline by 2 percentage points

DoubleVerify trades at $10.04 per share, or 2x forward price-to-sales. If you’re considering DV for your portfolio, check out our FREE research report to learn more.

Market capitalization: $13.21 billion

With its systems powering the operations of hundreds of insurance brands in 42 countries, Guidewire Software (NYSE:GWRE) provides a technology platform that helps property and casualty insurers manage their core operations, digital engagement and analytics.

Why do we support GWRE?

1. Billing growth averaged 21.1% last year, indicating a healthy pipeline of new business that should drive future revenue increases

2. Well-designed software integrates seamlessly with other workflows, enabling rapid return on marketing costs and customer growth at scale

3. Has the ability to reinvest or return capital to investors as its free cash flow margin of 21.9% is well above peers

Guidewire Software’s stock price of $156 implies a valuation ratio of 8.8x forward price-to-sales. Is Now the Time to Take a Position? Find out in our full research report, it’s free.

WHILE YOU’RE HERE: Top 9 stocks that are beating the market. The best stocks don’t beat the market just once. They’re doing it again. And again. Robust revenue growth, rising free cash flow, return on capital that leaves the competition in the dust. The market has already rewarded these companies.

But our AI platform says the party isn’t over yet. Find out which 9 stocks made the cut this week – FREE. Get our top 9 market-beating stocks for free HERE.

The stocks that made our list in 2020 include now household names like Nvidia (+1,326% between June 2020 and June 2025) and under-the-radar companies like the once microcap company Kadant (+351% five-year return). Find your next big winner today with StockStory.