Software is eating the world, and virtually no business is left untouched by it. Companies bringing it to life have been rewarded with explosive earnings growth, and the upward trend shows no signs of stopping as the industry has posted a 45.2% gain over the past six months, beating the S&P 500 by 28.9 percentage points.
However, only a handful of companies will ultimately thrive over the long term as the low barriers to entry for software businesses lead to fierce competition. Keeping that in mind, here is one software stock poised to generate sustainable market-beating returns and two that may face trouble.
Two Software Stocks to Sell:
Qualys (QLYS)
Market Cap: $6.48 billion
Originally developed to address the growing complexity of IT security in the cloud era, Qualys (NASDAQ: QLYS) provides a cloud-based platform that helps organizations identify, manage, and protect their IT assets from cyber threats across on-premises, cloud, and mobile environments.
Why Does QLYS Fall Short?
- ARR growth averaged a weak 10.3% over the last year, suggesting that competition is pulling some attention away from its software
- Anticipated sales growth of 8.9% for the next year implies demand will be shaky
- Operating margin expanded by 3.4 percentage points over the last year as it scaled and became more efficient
Qualys is trading at $187.55 per share, or 8.6x forward price-to-sales. To fully understand why you should be careful with QLYS, check out our full research report (it’s free).
Procore Technologies (PCOR)
Market Cap: $7.85 billion
With a mission to build software for the people that build the world, Procore Technologies (NYSE: PCOR) provides cloud-based software that enables owners, contractors, and other stakeholders to collaborate and manage construction projects from any device.
Why Are We Cautious About PCOR?
- Estimated sales growth of 13.4% for the next 12 months implies demand will slow from its two-year trend
- Suboptimal cost structure is highlighted by its history of operating margin losses
At $52.18 per share, Procore Technologies trades at 4.9x forward price-to-sales. If you’re considering PCOR for your portfolio, see our FREE research report to learn more.
One Software Stock to Buy:
Palantir Technologies (PLTR)
Market Cap: $456.7 billion
Named after the all-seeing stones in "Lord of the Rings," Palantir Technologies (NASDAQ: PLTR) develops software platforms that help government agencies and enterprises integrate, analyze, and operationalize their data for decision-making.
Why Will PLTR Outperform?
- Billings growth has averaged 76.7% over the last year, indicating a healthy pipeline of new contracts that should drive future revenue increases
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
- PLTR is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Palantir Technologies’s stock price of $190.60 implies a valuation ratio of 47.2x 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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