2 Software Stocks on Our Watchlist and 1 We Ignore

Software is eating the world, and virtually no business is left untouched by it. In the past, the undeniable tailwinds fueling SaaS companies led to lofty valuation multiples that made it easier to raise capital. But this was a double-edged sword as the high prices exposed them to big drawdowns, and unfortunately, the industry has tumbled by 12.3% over the last six months. This drawdown is a far cry from the S&P 500’s 8.1% ascent.

A cautious approach is imperative when dabbling in these businesses as the best will deliver robust earnings growth while the rest will be disrupted by competition and AI. On that note, here are two software stocks we think can generate sustainable market-beating returns and one that may face trouble.

One Software Stock to Sell:

BlackLine (BL)

Market Cap: $3.16 billion

Born from the vision to eliminate tedious manual spreadsheet work for accountants, BlackLine (NASDAQ:BL) provides cloud-based software that automates and streamlines financial close, intercompany accounting, and invoice-to-cash processes for accounting departments.

Why Are We Hesitant About BL?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 7.2% underwhelmed
2. Customers generally do not adopt complementary products as its 103% net revenue retention rate lags behind the industry standard
3. Static operating margin over the last year shows it couldn’t become more efficient

At $53.11 per share, BlackLine trades at 4.4x forward price-to-sales. Check out our free in-depth research report to learn more about why BL doesn’t pass our bar.

Two Software Stocks to Watch:

JFrog (FROG)

Market Cap: $6.74 billion

Named after the amphibian that continuously evolves from egg to tadpole to adult, JFrog (NASDAQ:FROG) provides a platform that helps organizations securely create, store, manage, and distribute software packages across any system.

Why Are We Backing FROG?

1. Billings growth has averaged 22.9% over the last year, indicating a healthy pipeline of new contracts that should drive future revenue increases
2. Software platform has product-market fit given the rapid recovery of its customer acquisition costs
3. Robust free cash flow margin of 28% gives it many options for capital deployment

JFrog’s stock price of $56.80 implies a valuation ratio of 10.8x forward price-to-sales. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.

Confluent (CFLT)

Market Cap: $10.88 billion

Built by the original creators of Apache Kafka, the popular open-source messaging system, Confluent (NASDAQ:CFLT) provides a data infrastructure platform that enables organizations to connect their applications, systems, and data layers around real-time data streams.

Why Are We Positive On CFLT?

1. Average billings growth of 26.1% over the last year enhances its liquidity and shows there is steady demand for its products
2. Projected revenue growth of 16.7% for the next 12 months suggests its momentum from the last two years will persist
3. Above-average gross margin of 74.1% gives it the ability to invest in R&D and run marketing campaigns

Confluent is trading at $30.39 per share, or 8.1x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.

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