Software is rapidly reducing operating expenses for businesses. This secular theme has materialized in superior earnings growth and stock price performance for most SaaS companies, and over the last six months, the industry’s 39.6% return has topped the S&P 500 by 26.7 percentage points.
Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. With that said, here are two resilient software stocks at the top of our wish list and one that may face trouble.
One Software Stock to Sell:
PubMatic (PUBM)
Market Cap: $791 million
Powering billions of daily ad impressions across the open internet, PubMatic (NASDAQ: PUBM) operates a technology platform that helps publishers maximize revenue from their digital advertising inventory while giving advertisers more control and transparency.
Why Are We Out on PUBM?
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 96% net revenue retention rate
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 11.5 percentage points
At $16.90 per share, PubMatic trades at 2.5x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PUBM.
Two Software Stocks to Watch:
HubSpot (HUBS)
Market Cap: $11.28 billion
Born from the idea that traditional interruptive marketing was becoming less effective, HubSpot (NYSE: HUBS) provides an integrated platform that helps businesses attract, engage, and manage customer relationships through marketing, sales, service, and content management tools.
Why Does HUBS Stand Out?
- Annual revenue growth of 20% over the last two years was superb and indicates its market share is rising
- ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
- Software is difficult to replicate at scale and leads to a premier gross margin of 83.2%
HubSpot’s stock price of $224.65 implies a valuation ratio of 2.8x forward price-to-sales. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
Atlassian (TEAM)
Market Cap: $41.26 billion
Started by two Australian university friends who funded their startup with credit cards, Atlassian (NASDAQ: TEAM) provides software tools that help teams plan, track, collaborate, and share knowledge across organizations.
Why Are We Positive on TEAM?
- Market share has increased as its 22.8% annual revenue growth over the last two years was exceptional
- Billings have averaged 20.5% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
- Prominent and differentiated software leads to a best-in-class gross margin of 85.6%
Atlassian is trading at $162.75 per share, or 5.4x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
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