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 27.5% over the past six months. This drawdown was much worse than the S&P 500’s 3.2% decline.
Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. Taking that into account, here are three software stocks we’re steering clear of.
Salesforce (CRM)
Market Cap: $165.5 billion
With its cloud-based platform named after its stock ticker symbol CRM (Customer Relationship Management), Salesforce (NYSE: CRM) provides customer relationship management software that helps businesses connect with their customers across sales, service, marketing, and commerce.
Why Do We Think Twice About CRM?
- Customers were hesitant to make long-term commitments to its software as its 10.3% average ARR growth over the last year was sluggish
- Estimated sales growth of 11% for the next 12 months is soft and implies weaker demand
- Operating margin expanded by 1 percentage points over the last year as it scaled and became more efficient
Salesforce’s stock price of $178.82 implies a valuation ratio of 3.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than CRM.
BILL (BILL)
Market Cap: $3.66 billion
Transforming the messy back-office financial operations that plague small business owners, BILL (NYSE: BILL) provides a cloud-based platform that automates accounts payable, accounts receivable, and expense management for small and midsize businesses.
Why Should You Dump BILL?
- Products, pricing, or go-to-market strategy may need some adjustments as its 11.7% average billings growth over the last year was weak
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
BILL is trading at $36.90 per share, or 2.2x forward price-to-sales. Check out our free in-depth research report to learn more about why BILL doesn’t pass our bar.
Autodesk (ADSK)
Market Cap: $48.5 billion
Starting with AutoCAD in the 1980s and evolving into a comprehensive design ecosystem, Autodesk (NASDAQ: ADSK) provides software solutions for architecture, engineering, construction, manufacturing, and entertainment industries to design, simulate, and visualize projects.
Why Are We Cautious About ADSK?
- Annual revenue growth of 13.7% over the last five years was below our standards for the software sector
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs
At $229.49 per share, Autodesk trades at 6.3x forward price-to-sales. If you’re considering ADSK for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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