We recently compiled a list of the 7 cheap software stocks to invest in. In this article, we’ll take a look at where Five9 (NASDAQ:FIVN) stands compared to the other cheap software stocks.
Avoiding hype and focusing on downstream opportunities
Billionaire investor David Tepper, founder and president of Appaloosa Management, recently shared his thoughts on the market and investment strategies in a conversation on CNBC on September 26. Tepper started by discussing his views on technology stocks, specifically mentioning Meta and Google, which he owns. , and Nvidia, which he previously sold due to concerns about its high valuation.
Tepper also discussed energy, specifically the growing demand for power to support the development of new technologies such as artificial intelligence (AI). He emphasized the importance of natural gas to meet this demand and stated that it is necessary to stimulate the growth of AI. Tepper expressed skepticism about the feasibility of relying solely on renewable energy sources, citing the need for a more practical and realistic approach to meeting the country’s energy needs. He also said he has spoken with governors from both sides of the aisle and believes a collective effort is needed to meet the nation’s energy needs.
When asked about the upcoming elections, Tepper stated that he favors a split government, believing it is beneficial for the economy and markets. He expressed concern about the potential for a bipartisan sweep, citing the risks of populist and progressive policies that could lead to giveaways and increased government spending. Tepper emphasized that his views are purely from a market perspective and that he does not want either party to dominate the government. He believes a split government will prevent either side from pursuing extreme policies, which would benefit markets.
Regarding AI, Tepper acknowledged that it is a fast-growing field, but expressed caution about investing directly in AI companies. Instead, he prefers to invest in downstream companies that will benefit from the growth of AI. Tepper also said he is impressed by AI’s potential to drive growth and innovation, but is unsure about the long-term prospects of certain companies that rely heavily on AI.
In terms of his investment strategy, Tepper emphasized the importance of being cautious and not getting caught up in the hype surrounding certain stocks or trends. He noted that he has been successful in the past by being contrarian and taking a more nuanced approach to investing. Tepper also said he is not afraid to take a step back and reevaluate his investment decisions, citing the importance of adaptability in a rapidly changing market environment.
David Tepper’s insights on market and investment strategies provide valuable perspective on the current state of the economy and technology industry. His emphasis on prudence and adaptability in a rapidly changing market environment is a timely reminder for investors to remain vigilant and avoid getting caught up in the hype surrounding certain stocks or trends. With that in context, let’s take a look at the seven cheap software stocks to invest in.
Our Methodology
To create our list of the seven cheap software stocks to invest in, we used stock screeners from Finviz and Yahoo to find the 30 largest software companies with a price-to-earnings ratio of less than 20. Based on that list, we narrowed our picks to the seven stocks that analysts see the most upside in. The list is sorted in ascending order of analysts’ average upside potential, as of October 3. We’ve also added the hedge fund sentiment around each stock, which was pulled from our database of 912 elite hedge funds, as of Q2 2024. The list is sorted in ascending order of their average upside potential.
Why do we care what hedge funds do? The reason is simple: our research shows that we can outperform the market by imitating the best stock picks from the best hedge funds. Our quarterly newsletter strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points (see more details here).
An IT engineer works on a laptop as planograms for a cloud-based virtual contact center platform appear on the monitor.
Five9 (NASDAQ:FIVN)
Future price-earnings ratio as of October 3: 12.43
Upside potential: 61.57%
Number of hedge fund holders: 34
Five9 (NASDAQ:FIVN) offers cloud contact center software for companies looking to increase customer engagement. The platform enables seamless communication across various channels, including telephone, email and social media.
Five9 (NASDAQ:FIVN) focuses on improving the customer experience through automation and AI. The company’s AI and automation offerings are expected to play a major role in its future growth and profitability. Management noted that these offerings have higher gross margins than traditional contact center software and are expected to contribute to the company’s revenue growth going forward. Five9’s (NASDAQ:FIVN) ability to offer a comprehensive suite of contact center software solutions, including AI and automation, is a key differentiator in the market and is expected to drive its growth and profitability. Five9 (NASDAQ:FIVN) recently announced a major customer win, which is expected to contribute $50 million in annual recurring revenue (ARR) over the next few years.
Additionally, Five9’s (NASDAQ:FIVN) first-quarter earnings report showed an EBITDA margin of 15.2%, which was 110 basis points above the consensus estimate. This margin expansion is a positive sign for the company’s profitability and is expected to continue to improve in the future. The company is targeting an EBITDA margin of 23% or higher by 2027 and has multiple levers to achieve this goal, including economies of scale, increasing subscription revenue and growing its AI and automation offerings. Brown Capital Management stated the following about Five9. (NASDAQ:FIVN) in their second quarter investor letter:
“Five9, Inc. (NASDAQ:FIVN) is a leader in cloud-based contact center software, which serves as a routing engine to connect callers with agents. With the growth of e-commerce, consumers are making fewer in-person visits to stores and contacting businesses more often, increasing the need for world-class contact center software solutions like those from Five9. It’s been a rough few years for Five9 stock, and this quarter didn’t bring any relief. Competitive concerns, questions about AI’s long-term impact on the business, and deteriorating macroeconomic conditions have all cast clouds over the company’s stock. Five9’s consumer segment, one of its largest divisions, has struggled recently as customers hire fewer call center agents, putting pressure on Five9’s seat-based revenue model. Overall revenue growth slowed to 13% year-over-year in the most recent quarter, compared to 28% and 17% in 2022 and 2023, respectively. Additionally, management targeted 16% for full-year 2024, which some see as optimistic given the weak start of the year. These deteriorating sales trends further weighed on shares during the quarter.
Looking through the current industry doldrums, we see a bright future for Five9. The company signed its largest deal ever this quarter, which will generate more than $50 million in annual revenue once fully rolled out. We believe this is an important signal of Five9’s long-term potential. The company is capitalizing on a $60 billion market opportunity, winning new customers at industry-leading rates and gaining market share from incumbents stuck with outdated technology. We continue to assess the potential threat of AI, but so far it has boosted the bottom line. The company’s AI product is very popular among large enterprises because it helps agents with customer interactions and can sometimes be used to fully automate interactions. Rather than reducing the number of industrial seats as some fear, management said revenue per seat will double as customers adopt its AI applications. We expect revenue growth to pick up significantly in the coming years, which should result in much stronger stock performance.”
Five9’s (NASDAQ:FIVN) strong growth prospects show that the company can grow as more companies adopt cloud-based communications solutions.
In short, FIVN is in 4th place on our list of cheap software stocks to invest in. While we recognize FIVN’s potential as an investment, our belief lies in the belief that AI stocks hold greater promise for delivering higher returns in a shorter time frame. If you’re looking for an AI stock that’s more promising than FIVN but trades at less than five times earnings, check out our report on the cheapest AI stocks.
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Disclosure: None. This article was originally published on Insider Monkey.
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