Over the past six months, Asure Software’s shares (currently trading at $7.99) have posted a disappointing 18% loss, well below the S&P 500’s 11.3% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Asure Software, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Do We Think Asure Software Will Underperform?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons you should be careful with ASUR and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Asure Software grew its sales at a 14.6% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

2. Operating Margin in Limbo

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Analyzing the trend in its profitability, Asure Software’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was negative 9.6%.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Asure Software has shown weak cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.5%, subpar for a software business.

Final Judgment

We see the value of companies addressing major business pain points, but in the case of Asure Software, we’re out. Following the recent decline, the stock trades at 1.4× forward price-to-sales (or $7.99 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

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