3 Software Stocks That Concern Us

Software is eating the world, and virtually no business is left untouched by it. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have capped returns lately as the industry was flat over the past six months and trailed the S&P 500’s 13.6% gain.

A cautious approach is imperative when dabbling in these businesses as their valuations could plummet if AI disrupts their earnings potential. On that note, here are three software stocks we’re swiping left on.

Asana (ASAN)

Market Cap: $3.46 billion

Born from the founders' frustration with the inefficiencies of email-based collaboration at Facebook, Asana (NYSE:ASAN) provides a work management platform that helps organizations track projects, set goals, and manage workflows in a centralized digital workspace.

Why Do We Steer Clear of ASAN?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 9.3% underwhelmed
2. Net revenue retention rate of 95.7% shows it has a tough time retaining customers
3. Software platform has intricate integration requirements for its enterprise clients, triggering long sales cycles that limit new customer additions

At $14.58 per share, Asana trades at 4.3x forward price-to-sales. Read our free research report to see why you should think twice about including ASAN in your portfolio.

Q2 Holdings (QTWO)

Market Cap: $4.66 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 Are We Cautious About QTWO?

1. ARR growth averaged a weak 11.3% over the last year, suggesting that competition is pulling some attention away from its software
2. Estimated sales growth of 10.7% for the next 12 months implies demand will slow from its two-year trend
3. Bad unit economics and steep infrastructure costs are reflected in its gross margin of 53.4%, one of the worst among software companies

Q2 Holdings is trading at $74.54 per share, or 6.1x forward price-to-sales. To fully understand why you should be careful with QTWO, check out our full research report (it’s free for active Edge members).

VeriSign (VRSN)

Market Cap: $22.46 billion

As the silent guardian of the internet's roadmap, VeriSign (NASDAQ:VRSN) operates the authoritative registry for .com and .net domain names, enabling websites to be found reliably when users type web addresses.

Why Does VRSN Fall Short?

1. Muted 4.8% annual revenue growth over the last two years shows its demand lagged behind its software peers
2. Estimated sales growth of 4.9% for the next 12 months is soft and implies weaker demand
3. Operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs

VeriSign’s stock price of $242.33 implies a valuation ratio of 13.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than VRSN.

Stocks We Like More

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