From commerce to culture, software is digitizing every aspect of our lives. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have weighed on the returns lately as the industry has pulled back by 13.5% over the past six months. This drop is a stark contrast from the S&P 500’s 11.5% gain.
However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. Keeping that in mind, here is one resilient software stock at the top of our wish list and two that may face trouble.
Two Software Stocks to Sell:
Twilio (TWLO)
Market Cap: $30.06 billion
Known for the clever "Twilio Magic" demo that had developers creating functioning communications apps in minutes, Twilio (NYSE: TWLO) provides a platform that enables businesses to communicate with their customers through voice, messaging, email, and other digital channels.
Why Are We Cautious About TWLO?
- Net revenue retention rate of 110% trails the industry benchmark of 110%+ and shows it has a tough time increasing customer spending
- Sky-high servicing costs result in an inferior gross margin of 48.7% that must be offset through increased usage
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
Twilio’s stock price of $197.63 implies a valuation ratio of 5.1x forward price-to-sales. To fully understand why you should be careful with TWLO, check out our full research report (it’s free).
Manhattan Associates (MANH)
Market Cap: $7.64 billion
Built on a "versionless" cloud architecture that delivers quarterly updates to all customers, Manhattan Associates (NASDAQ: MANH) develops cloud-based software that helps retailers, wholesalers, and manufacturers manage their supply chains, inventory, and omnichannel operations.
Why Do We Think Twice About MANH?
- Average billings growth of 5.8% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Gross margin of 56% reflects its high servicing costs
- Static operating margin over the last year shows it couldn’t become more efficient
Manhattan Associates is trading at $132.00 per share, or 6.4x forward price-to-sales. Check out our free in-depth research report to learn more about why MANH doesn’t pass our bar.
One Software Stock to Buy:
PTC (PTC)
Market Cap: $16.15 billion
Originally known as Parametric Technology Corporation until its 2013 rebranding, PTC (NASDAQ: PTC) provides software that helps manufacturers design, develop, and service physical products through digital solutions for CAD, PLM, ALM, and SLM.
Why Are We Bullish on PTC?
- Average billings growth of 21% over the last year enhances its liquidity and shows there is steady demand for its products
- Prominent and differentiated software results in a premier gross margin of 84.7%
- Disciplined cost controls and effective management resulted in a strong trailing 12-month operating margin of 38.7%, and its operating leverage amplified its profits over the last year
At $139.95 per share, PTC trades at 6.2x forward price-to-sales. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
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