From commerce to culture, software is digitizing every aspect of our lives. This secular theme has materialized in superior earnings growth and stock price performance for most SaaS companies, and over the last six months, the industry’s 54.6% return has topped the S&P 500 by 45.5 percentage points.
Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. Keeping that in mind, here is one software stock poised to generate sustainable market-beating returns and two we would avoid.
Two software stocks to sell:
UiPath (PATH)
Market Cap: $7.26 billion
Starting with robotic process automation (RPA) and evolving into a comprehensive automation powerhouse, UiPath (NYSE: PATH) provides an AI-powered business automation platform that enables organizations to create software robots that mimic human actions to streamline repetitive tasks and processes.
Why Does PATH Worry Us?
- ARR growth averaged a weak 11.7% over the last year, suggesting that competition is pulling some attention away from its software
- Estimated sales growth of 8.2% for the next 12 months implies demand will slow from its two-year trend
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
UiPath’s stock price of $13.83 implies a valuation ratio of 3.9x forward price-to-sales. To fully understand why you should be careful with PATH, check out our full research report (it’s free).
Oracle (ORCL)
Market Cap: $380.6 billion
Starting as a database company in 1977 and now powering mission-critical systems across the globe, Oracle (NYSE: ORCL) provides enterprise software and hardware products and services that help businesses manage their information technology needs.
Why Does ORCL Give Us Pause?
- Annual sales growth of 11.9% over the last five years lagged behind its software peers as its large revenue base made it difficult to generate incremental demand
- Cash-burning history makes us doubt the long-term viability of its business model
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Oracle is trading at $125.06 per share, or 3.9x forward price-to-sales. If you’re considering ORCL for your portfolio, see our FREE research report to learn more.
One software stock to watch:
HubSpot (HUBS)
Market Cap: $13.32 billion
Born from the idea that traditional interruptive marketing was becoming less effective, HubSpot (NYSE: HUBS) provides an integrated platform that helps businesses attract, engage, and manage customer relationships through marketing, sales, service, and content management tools.
Why Are We Fans of HUBS?
- Annual revenue growth of 20% over the last two years was superb and indicates its market share is rising
- ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
- Prominent and differentiated software culminates in a stellar gross margin of 83.2%
At $262.63 per share, HubSpot trades at 3.2x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
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