The software industry generated solid growth last year on a COVID-19 pandemic-driven increase in dependency on software solutions. That trend has been continuing this year with increasing adoption of advanced software in almost every industry as part of broad digital transformation.. According to Grand View Research, the global business software and services market is expected to grow at an 11.3% CAGR between 2021 - 2028.
Investors’ increasing interest in software stocks is evident in the SPDR S&P Software & Services ETF’s (XSW) 8.9% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 2% gains. However, this has led to sky-high valuations for some software stocks.
The valuations of MongoDB, Inc. (MDB), Appian Corporation (APPN), and Fastly, Inc. (FSLY) at their current price levels are not justified by their financials and growth prospects. In fact, Wall Street analysts believe these stocks could continue declining in the near term. So, we think it’s wise to avoid these stocks now.
Click here to check out our Software Industry Report for 2021
MongoDB, Inc. (MDB)
MDB provides a general-purpose database platform worldwide. The company offers MongoDB Enterprise Advanced, a commercial database server that enterprise customers can run in the cloud, on-premises, or in hybrid environments. Its offerings also include MongoDB Atlas, which is a hosted multi-cloud database-as-a-service solution.
MDB’s non-GAAP loss from operations increased 13.5% year-over-year to $8.40 million for its fiscal first quarter, ended April 30. Its non-GAAP net loss increased 30.1% year-over-year to $9.5 million, while its total liabilities increased16.9% sequentially to $1.64 billion. The company’s non-GAAP loss per share increased 15.4% year-over-year to $0.15.
In terms of forward EV/S, MBD’s 30.84x is 639.1% higher than the 4.17x industry average. In terms of forward Price/Sales, the stock’s 30.05x is 640.9% higher than the 4.06x industry average.
Analysts expect MDB’s annual revenue to increase 33% year-over-year to $785.42 million in its fiscal year 2022. However, the company’s EPS is expected to decrease 77.3% for the quarter ending June 30 and remain negative in 2022 and 2023. The stock has lost 84.5% over the past year to close yesterday’s trading session at $380.94. Wall Street Analysts expect the stock to hit $368.56 in the near-term, which indicates a potential 3.3% decline.
MDB’s poor prospects are apparent in its POWR Ratings also. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a D grade for Growth, Value, Stability, and Sentiment. Click here to see additional POWR ratings for MBD (Momentum and Quality). It is ranked #117 of 128 stocks in the D-rated Software - Application industry.
Appian Corporation (APPN)
APPN offers a low-code automation platform that automates the creation of forms, workflows, data structures, reports, and other software elements. It provides its services to a range of industries, including energy, insurance, manufacturing, public sector, retail and transportation.
The company unveiled the latest version of the Appian Low-code Automation Platform on May 11. The product expands the boundaries of the low-code industry with the introduction of low-code data, and a code-free approach to unifying enterprise data. However, with the increasing number of products and services in this space, APPN’s offering might not help it in grabbing significant market share.
APPN’s cash and cash equivalents decreased 23.1% year-over-year to $114.75 million for its fiscal first quarter, ended March 31, 2021. Its non-GAAP operating loss came in at $0.90 million versus $5.10 million in the prior-year period. Its non-GAAP net loss was $4 million compared to $8.2 million in the year-ago period. The company’s non-GAAP loss per share was $0.06 versus $0.12 in the same period last year.
In terms of forward EV/Sales, APPN’s 27.24x is 552.9% higher than the 4.17x industry average. The stock’s 27.73x forward P/S is 583.6% higher than the 4.06x industry average.
The company’s revenue is expected to increase 27.7% year-over-year to $90.52 million for the quarter ending September 30, 2021. However, analysts expect APPN’s EPS to decrease 142.3% in its fiscal year 2021 and remain negative in 2021 and 2022. The stock has lost 14.3% year-to-date to close yesterday’s trading session at $131.61. Wall Street analysts expect the stock to hit $105.60 in the near term, indicating a potential 19.8% decline.
APPN’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which translates to Sell in our proprietary rating system. It has a D grade for Growth, Value, Stability, and Sentiment.
Click here to see APPN’s rating for Quality and Momentum as well. APPN is ranked #101 in the Software - Application industry.
Fastly, Inc. (FSLY)
FSLY operates an edge cloud platform for processing, serving, and securing its customer's applications internationally. It provides edge security solutions such as DDoS protection, edge web application firewall (WAF), transport layer security (TLS), and compliance services, among others.
A consolidated complaint was filed against FSLY on April 12, 2021. It is alleged that the company failed to disclose that its revenue growth was driven by its single largest customer, China-based ByteDance, the operator of the wildly popular video sharing application TikTok. At the time, TikTok was under threat of being shut down in the United States. FSLY allegedly did not mention TikTok and the risk it posed to its revenues.
FSLY’s non-GAAP operating loss increased 128.5% year-over-year to $12.90 million for its fiscal first quarter, ended March 31, 2021. Its non-GAAP net loss for the quarter was $13.62 million, which represents a 140.7% year-over-year increase. Its total liabilities increased 591.6% sequentially to $1.09 billion. The company’s non-GAAP loss per share increased 100% year-over-year to $0.12.
In terms of forward EV/S, FSLY’s 16.97x is 306.6% higher than the 4.17x industry average. In terms of forward P/S, the stock’s 16.92x is 317.1% higher than the 4.06x industry average.
FSLY’s annual revenue is expected to increase 31.4% year-over-year to $382.18 million in its fiscal year 2021. However, its EPS is expected to decrease 950% in the current quarter, ending June 30, 2021, and remain negative in 2021 and 2022. The stock has lost 46.3% over the past six months to close yesterday’s trading session at $56.27. Wall Street Analysts expect the stock to hit $49.20 in the near-term, which indicates a potential 12.6% decline.
FSLY’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system. The stock has an F grade for Growth and Sentiment, and a D grade for Value, Stability, and Quality.
Click here to see FSLY’s ratings for Momentum also. FSLY is ranked #128 in the Software - Application industry.
Click here to check out our Software Industry Report for 2021
MDB shares were trading at $384.66 per share on Wednesday morning, up $3.72 (+0.98%). Year-to-date, MDB has gained 7.14%, versus a 14.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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