3 Software Stocks with Warning Signs

From commerce to culture, software is digitizing every aspect of our lives. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 3.8%. This drawdown is a noticeable divergence from the S&P 500’s 9.9% return.

While some can support their premium valuations with superior earnings growth, the odds aren’t great for the businesses we’re analyzing today. With that said, here are three software stocks we’re steering clear of.

Elastic (ESTC)

Market Cap: $7.95 billion

Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE:ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.

Why Do We Think Twice About ESTC?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 13.9% underwhelmed
2. Estimated sales growth of 13.6% for the next 12 months implies demand will slow from its two-year trend
3. Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage

Elastic’s stock price of $75.08 implies a valuation ratio of 4.4x forward price-to-sales. Read our free research report to see why you should think twice about including ESTC in your portfolio.

Upstart (UPST)

Market Cap: $4.25 billion

Using over 2,500 data variables and trained on nearly 82 million repayment events, Upstart (NASDAQ:UPST) is an AI-powered lending platform that uses machine learning to help banks and credit unions more accurately assess borrower risk for personal loans, auto loans, and home equity lines of credit.

Why Are We Wary of UPST?

1. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
2. Cash-burning history makes us doubt the long-term viability of its business model
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Upstart is trading at $43.66 per share, or 3.9x forward price-to-sales. To fully understand why you should be careful with UPST, check out our full research report (it’s free for active Edge members).

Flywire (FLYW)

Market Cap: $1.73 billion

Initially created to solve the challenges of international student tuition payments, Flywire (NASDAQ:FLYW) provides specialized payment processing and software solutions that help educational institutions, healthcare systems, travel companies, and businesses manage complex payments.

Why Are We Cautious About FLYW?

1. High servicing costs result in a relatively inferior gross margin of 61.3% that must be offset through increased usage
2. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
3. Operating margin expanded by 3.7 percentage points over the last year as it scaled and became more efficient

At $14.16 per share, Flywire trades at 2.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FLYW.

Stocks We Like More

Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.

The names generating the next wave of massive growth are right here in our Top 6 Stocks for this week. 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 Kadant (+351% 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.