Software is eating the world, and virtually no business is left untouched by it. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 12.3%. This performance is a far cry from the S&P 500’s 5.5% ascent.
However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. On that note, here is one software stock boasting a durable advantage and two that may face trouble.
Two Software Stocks to Sell:
Wix (WIX)
Market Cap: $6.73 billion
Founded in 2006 in Tel Aviv, Wix.com (NASDAQ:WIX) offers a free and easy to operate website building platform.
Why Does WIX Fall Short?
- Revenue increased by 11.7% annually over the last three years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Gross margin of 68.4% is below its competitors, leaving less money to invest in areas like marketing and R&D
At $120.86 per share, Wix trades at 3.4x forward price-to-sales. Check out our free in-depth research report to learn more about why WIX doesn’t pass our bar.
Teradata (TDC)
Market Cap: $2.00 billion
Part of point-of-sale and ATM company NCR from 1991 to 2007, Teradata (NYSE:TDC) offers a software-as-service platform that helps organizations manage and analyze their data across multiple storages.
Why Should You Sell TDC?
- Customers had second thoughts about committing to its platform over the last year as its billings averaged 6.2% declines
- Sales are projected to tank by 2.5% over the next 12 months as its demand continues evaporating
- Gross margin of 59.3% reflects its high servicing costs
Teradata’s stock price of $21.17 implies a valuation ratio of 1.2x forward price-to-sales. Read our free research report to see why you should think twice about including TDC in your portfolio.
One Software Stock to Watch:
Paychex (PAYX)
Market Cap: $49.53 billion
One of the oldest service providers in the industry, Paychex (NASDAQ:PAYX) offers its customers payroll and HR software solutions.
Why Does PAYX Stand Out?
- Projected revenue growth of 17.5% for the next 12 months indicates demand will rise above its three-year trend
- Highly efficient business model is illustrated by its impressive 39.6% operating margin
- PAYX is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Paychex is trading at $137.72 per share, or 7.6x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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