3 Reasons to Avoid NCNO and 1 Stock to Buy Instead

Even though nCino (currently trading at $26.33 per share) has gained 21.2% over the last six months, it has lagged the S&P 500’s 32.7% return during that period. This might have investors contemplating their next move.

Is there a buying opportunity in nCino, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Is nCino Not Exciting?

We don't have much confidence in nCino. Here are three reasons there are better opportunities than NCNO and a stock we'd rather own.

1. Lackluster Revenue Growth

We at StockStory place the most emphasis on long-term growth, but within software, a stretched historical view may miss recent innovations or disruptive industry trends. nCino’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 13.4% over the last two years was well below its five-year trend.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect nCino’s revenue to rise by 5.7%, a deceleration versus its 27.5% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.

3. Low Gross Margin Reveals Weak Structural Profitability

For software companies like nCino, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

nCino’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.2% gross margin over the last year. That means nCino paid its providers a lot of money ($39.77 for every $100 in revenue) to run its business.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. nCino has seen gross margins improve by 1.1 percentage points over the last 2 year, which is slightly better than average for software.

Final Judgment

nCino’s business quality ultimately falls short of our standards. With its shares trailing the market in recent months, the stock trades at 5× forward price-to-sales (or $26.33 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the most dominant software business in the world.

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