Software is eating the world, and virtually no business is left untouched by it. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 56.3% over the past six months, outpacing the S&P 500’s 12% rise.
Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. On that note, here is one resilient software stock at the top of our wish list and two we’re steering clear of.
Two Software Stocks to Sell:
Elastic (ESTC)
Market Cap: $9.90 billion
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE: ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Is ESTC Not Exciting?
- Average billings growth of 14% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Customer acquisition costs are recovered fairly quickly, allowing the company to invest in growth initiatives
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
Elastic is trading at $94.49 per share, or 4.8x forward price-to-sales. Check out our free in-depth research report to learn more about why ESTC doesn’t pass our bar.
Wix (WIX)
Market Cap: $3.00 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 Does WIX Give Us Pause?
- Offerings struggled to generate meaningful interest as its average billings growth of 13.9% over the last year did not impress
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 17.5 percentage points
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 4.1 percentage points over the next year
Wix’s stock price of $71.73 implies a valuation ratio of 1.3x forward price-to-sales. If you’re considering WIX for your portfolio, see our FREE research report to learn more.
One Software Stock to Watch:
GitLab (GTLB)
Market Cap: $8.66 billion
With its all-remote workforce pioneering a new approach to software development, GitLab (NASDAQ: GTLB) provides a single-application DevSecOps platform that helps development, operations, and security teams collaborate to build, secure, and deploy software faster.
Why Are We Positive on GTLB?
- Annual revenue growth of 25.9% over the last two years was superb and indicates its market share is rising
- Ability to secure long-term commitments with customers is evident in its 23.3% ARR growth over the last year
- Prominent and differentiated software culminates in a best-in-class gross margin of 85.9%
At $50.42 per share, GitLab trades at 7.8x forward price-to-sales. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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