Software is rapidly reducing operating expenses for businesses. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 24.1%. This drawdown was noticeably worse than the S&P 500’s 2.8% decline.
While some can support their premium valuations with superior earnings growth, the odds aren’t great for the businesses we’re analyzing today. On that note, here are three software stocks that may face trouble.
Akamai Technologies (AKAM)
Market Cap: $16.77 billion
With a massive distributed network spanning 4,100+ points of presence in nearly 130 countries, Akamai Technologies (NASDAQ: AKAM) provides a global distributed cloud platform that helps businesses deliver, secure, and optimize their digital experiences online.
Why Should You Sell AKAM?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 4.6% underwhelmed
- Gross margin of 58.9% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
At $115.86 per share, Akamai Technologies trades at 3.8x forward price-to-sales. Check out our free in-depth research report to learn more about why AKAM doesn’t pass our bar.
Agilysys (AGYS)
Market Cap: $1.95 billion
With a tech stack that powers everything from check-in to checkout at some of the world's top hospitality venues, Agilysys (NASDAQ: AGYS) develops and provides cloud-based and on-premise software solutions for hotels, resorts, casinos, and restaurants to manage operations and enhance guest experiences.
Why Do We Think Twice About AGYS?
- Annual revenue growth of 17.2% over the last five years was below our standards for the software sector
- Gross margin of 61.7% reflects its relatively high servicing costs
- Operating margin expanded by 3.6 percentage points over the last year as it scaled and became more efficient
Agilysys’s stock price of $69.62 implies a valuation ratio of 5.8x forward price-to-sales. If you’re considering AGYS for your portfolio, see our FREE research report to learn more.
American Express Global Business Travel (GBTG)
Market Cap: $2.91 billion
Originally spun off from American Express in 2014 but maintaining the Amex GBT brand, Global Business Travel Group (NYSE: GBTG) provides end-to-end business travel and expense management solutions, connecting corporate clients with travel suppliers and offering specialized software services.
Why Do We Steer Clear of GBTG?
- Annual revenue growth of 8.9% over the last two years was well below our standards for the software sector
- Gross margin of 60.1% reflects its relatively high servicing costs
- Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency
American Express Global Business Travel is trading at $5.54 per share, or 0.9x forward price-to-sales. Read our free research report to see why you should think twice about including GBTG in your portfolio.
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