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 30.2% return has topped the S&P 500 by 18.5 percentage points.
Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. Taking that into account, here is one resilient software stock at the top of our wish list and two best left ignored.
Two Software Stocks to Sell:
Adobe (ADBE)
Market Cap: $103.1 billion
Originally named after Adobe Creek that ran behind co-founder John Warnock's house, Adobe (NASDAQ: ADBE) develops software products used for digital content creation, document management, and marketing solutions across desktop, mobile, and cloud platforms.
Why Do We Think Twice About ADBE?
- Offerings struggled to generate meaningful interest as its average billings growth of 12.3% over the last year did not impress
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 9.8%
- Operating margin didn’t move over the last year, showing it couldn’t increase its efficiency
Adobe is trading at $253.75 per share, or 3.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ADBE.
Bandwidth (BAND)
Market Cap: $1.47 billion
Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ: BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.
Why Do We Pass on BAND?
- 11.9% annual revenue growth over the last two years was slower than its software peers
- Gross margin of 37.2% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Static operating margin over the last year shows it couldn’t become more efficient
At $45.91 per share, Bandwidth trades at 1.7x forward price-to-sales. Check out our free in-depth research report to learn more about why BAND doesn’t pass our bar.
One Software Stock to Watch:
Intuit (INTU)
Market Cap: $89.7 billion
Originally named after its founding product "Intuitive for the first-time user," Intuit (NASDAQ: INTU) provides financial management software and services including TurboTax, QuickBooks, Credit Karma, and Mailchimp to help consumers and small businesses manage their finances.
Why Could INTU Be a Winner?
- User-friendly software enables clients to ramp up spending quickly, leading to the speedy recovery of customer acquisition costs
- Excellent operating margin of 27.5% highlights the efficiency of its business model, and it turbocharged its profits by achieving some fixed cost leverage
- Robust free cash flow margin of 36.9% gives it many options for capital deployment
Intuit’s stock price of $318.65 implies a valuation ratio of 3.9x forward price-to-sales. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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