1 Software Stock for Long-Term Investors and 2 We Find Risky
From commerce to culture, software is digitizing every aspect of our lives. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 46.7% over the past six months, outpacing the S&P 500’s 16.9% rise.
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. With that said, here is one software stock boasting a durable advantage and two that may face trouble.
Two Software Stocks to Sell:
Zoom (ZM)
Market Cap: $26.36 billion
Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ:ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.
Why Are We Bearish on ZM?
- Underwhelming ARR growth of 5% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 98.5% net revenue retention rate
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.9%
At $90.73 per share, Zoom trades at 5.3x forward price-to-sales. To fully understand why you should be careful with ZM, check out our full research report (it’s free).
Akamai (AKAM)
Market Cap: $15.87 billion
With a massive distributed network spanning 4,100+ points of presence in nearly 130 countries, Akamai Technologies (NASDAQ:AKAM) provides a global distributed cloud platform that helps businesses deliver, secure, and optimize their digital experiences online.
Why Do We Think AKAM Will Underperform?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 5.7% underwhelmed
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 57.5%, one of the worst among software companies
- Projected 22.8 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Akamai’s stock price of $133.25 implies a valuation ratio of 3.8x forward price-to-sales. If you’re considering AKAM for your portfolio, see our FREE research report to learn more.
One Software Stock to Watch:
PTC (PTC)
Market Cap: $14.91 billion
Originally known as Parametric Technology Corporation until its 2013 rebranding, PTC (NASDAQ:PTC) provides software that helps manufacturers design, develop, and service physical products through digital solutions for CAD, PLM, ALM, and SLM.
Why Does PTC Stand Out?
- Software is difficult to replicate at scale and leads to a premier gross margin of 84.5%
- User-friendly software enables clients to ramp up spending quickly, leading to the speedy recovery of customer acquisition costs
- Disciplined cost controls and effective management resulted in a strong trailing 12-month operating margin of 37.8%, and its rise over the last year was fueled by some leverage on its fixed costs
PTC is trading at $137.49 per share, or 5.8x forward price-to-sales. Is now a good time to buy? See for yourself in our full research report, it’s free.
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