Software is eating the world, and virtually no business is left untouched by it. 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 25.5%. This performance was particularly discouraging since the S&P 500 held its ground.
However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. Taking that into account, here is one resilient software stock at the top of our wish list and two that may face trouble.
Two Software Stocks to Sell:
Wix (WIX)
Market Cap: $5.16 billion
Powering over 263 million registered users worldwide with its AI-driven tools, Wix (NASDAQ: WIX) provides a cloud-based platform that helps individuals and businesses create and manage professional websites without requiring coding skills.
Why Is WIX Not Exciting?
- Products, pricing, or go-to-market strategy may need some adjustments as its 13.1% average billings growth over the last year was weak
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 5.6 percentage points
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 7.8 percentage points over the next year
Wix’s stock price of $89.15 implies a valuation ratio of 2.2x forward price-to-sales. If you’re considering WIX for your portfolio, see our FREE research report to learn more.
Teradata (TDC)
Market Cap: $2.47 billion
Pioneering data warehousing technology in the 1980s before "big data" was a common term, Teradata (NYSE: TDC) provides cloud-based data analytics and AI platforms that help large enterprises integrate, analyze, and leverage their data across multiple environments.
Why Are We Out on TDC?
- Flat billings over the last year suggest it may need to improve its products, pricing, or go-to-market strategy to reinvigorate demand
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Gross margin of 59.8% reflects its high servicing costs
At $26.85 per share, Teradata trades at 1.6x forward price-to-sales. Dive into our free research report to see why there are better opportunities than TDC.
One Software Stock to Buy:
The Trade Desk (TTD)
Market Cap: $11.48 billion
Built as an alternative to "walled garden" advertising ecosystems, The Trade Desk (NASDAQ: TTD) provides a cloud-based platform that helps advertisers and agencies plan, manage, and optimize digital advertising campaigns across multiple channels and devices.
Why Is TTD a Good Business?
- Annual revenue growth of 22% over the last two years was superb and indicates its market share is rising
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
- Excellent operating margin of 20.3% highlights the efficiency of its business model, and its rise over the last year was fueled by some leverage on its fixed costs
The Trade Desk is trading at $24.25 per share, or 3.5x 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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