From commerce to culture, software is digitizing every aspect of our lives. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have weighed on the returns lately as the industry has pulled back by 10.1% over the past six months. This drop is a far cry from the S&P 500’s 10% ascent.
While some can support their premium valuations with superior earnings growth, the odds aren’t great for the businesses we’re analyzing today. Keeping that in mind, here are three software stocks we’re swiping left on.
Adobe (ADBE)
Market Cap: $98.93 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 Does ADBE Give Us Pause?
- Customers were hesitant to make long-term commitments to its software as its 13% average ARR growth over the last year was sluggish
- Estimated sales growth of 8.6% for the next 12 months implies demand will slow from its two-year trend
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
Adobe is trading at $244.50 per share, or 3.8x forward price-to-sales. Check out our free in-depth research report to learn more about why ADBE doesn’t pass our bar.
C3.ai (AI)
Market Cap: $1.35 billion
Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE:AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.
Why Should You Sell AI?
- Customers had second thoughts about committing to its platform over the last year as its billings averaged 11.2% declines
- Gross margin of 43.5% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Cash burn makes us question whether it can achieve sustainable long-term growth
At $9.21 per share, C3.ai trades at 6.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than AI.
Q2 Holdings (QTWO)
Market Cap: $2.89 billion
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE:QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Do We Think Twice About QTWO?
- Average billings growth of 11% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 9.5% for the next 12 months implies demand will slow from its two-year trend
- Sky-high servicing costs result in an inferior gross margin of 55.6% that must be offset through increased usage
Q2 Holdings’s stock price of $46.14 implies a valuation ratio of 3.5x forward price-to-sales. If you’re considering QTWO for your portfolio, see our FREE research report to learn more.
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