Shareholders of Commerce would probably like to forget the past six months even happened. The stock dropped 40.7% and now trades at $2.64. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Commerce, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Commerce Will Underperform?
Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons why there are better opportunities than CMRC, plus one stock we’d rather own.
1. Weak ARR Points to Soft Demand
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Commerce’s ARR came in at $359.8 million in Q1, and over the last four quarters, its year-on-year growth averaged 2.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Commerce’s revenue to rise by 3.3%, close to its 15.9% annualized growth for the past five years. This projection doesn’t excite us and implies its newer products and services will not lead to better top-line performance yet.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Commerce’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 9.6% for the last 12 months will decrease to 9.2%.
Final Judgment
Commerce doesn’t pass our quality test. Following the recent decline, the stock trades at 0.6× forward price-to-sales (or $2.64 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.
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