3 Software Stocks Walking a Fine Line

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 13.3% gain.

Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. On that note, here are three software stocks that may face trouble.

Health Catalyst (HCAT)

Market Cap: $168.3 million

Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.

Why Should You Sell HCAT?

1. Annual revenue growth of 4.4% over the last two years was well below our standards for the software sector
2. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
3. Negative free cash flow raises questions about the return timeline for its investments

At $2.39 per share, Health Catalyst trades at 0.6x forward price-to-sales. Dive into our free research report to see why there are better opportunities than HCAT.

Qualys (QLYS)

Market Cap: $5.00 billion

Originally developed to address the growing complexity of IT security in the cloud era, Qualys (NASDAQ:QLYS) provides a cloud-based platform that helps organizations identify, manage, and protect their IT assets from cyber threats across on-premises, cloud, and mobile environments.

Why Are We Wary of QLYS?

1. Customers were hesitant to make long-term commitments to its software as its 10.1% average ARR growth over the last year was sluggish
2. Estimated sales growth of 8.1% for the next 12 months implies demand will slow from its two-year trend
3. Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient

Qualys is trading at $139.64 per share, or 7.2x forward price-to-sales. To fully understand why you should be careful with QLYS, check out our full research report (it’s free for active Edge members).

Semrush (SEMR)

Market Cap: $1.77 billion

Born from the need to make sense of the complex digital marketing landscape, Semrush (NYSE:SEMR) is a software-as-a-service platform that helps companies improve their online visibility, analyze digital marketing efforts, and optimize content across search engines and social media.

Why Is SEMR Not Exciting?

1. Below-average net revenue retention rate of 106% suggests it has some trouble expanding within existing accounts
2. Operating margin declined by 4.3 percentage points over the last year as it scaled
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Semrush’s stock price of $11.86 implies a valuation ratio of 3.6x forward price-to-sales. Check out our free in-depth research report to learn more about why SEMR doesn’t pass our bar.

Stocks We Like More

The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today.