1 Software Stock with Competitive Advantages and 2 to Keep Off Your Radar

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 8.8%. This drawdown was worse than the S&P 500’s 1.9% decline.

However, some businesses can support their premium valuations with superior earnings growth, and our mission at StockStory is to help you find them. Taking that into account, here is one software stock poised to generate sustainable market-beating returns and two we’re swiping left on.

Two Software Stocks to Sell:

DocuSign (DOCU)

Market Cap: $17.47 billion

Founded by Seattle-based entrepreneur Tom Gonser, DocuSign (NASDAQ:DOCU) is the pioneer of e-signature and offers software as a service that allows people and organisations to sign legally binding documents electronically.

Why Does DOCU Give Us Pause?

1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 6.6% underwhelmed
2. Estimated sales growth of 5.2% for the next 12 months implies demand will slow from its three-year trend
3. Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue

At $85.24 per share, DocuSign trades at 5.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than DOCU.

Sprout Social (SPT)

Market Cap: $1.25 billion

Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ:SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.

Why Does SPT Fall Short?

1. Rapid expansion strategy came at the expense of operating profitability
2. Poor free cash flow margin of 7.6% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Sprout Social is trading at $21.40 per share, or 2.7x forward price-to-sales. Check out our free in-depth research report to learn more about why SPT doesn’t pass our bar.

One Software Stock to Watch:

Toast (TOST)

Market Cap: $24.7 billion

Founded by three MIT engineers at a local Cambridge bar, Toast (NYSE:TOST) provides integrated point-of-sale (POS) hardware, software, and payments solutions for restaurants.

Why Are We Fans of TOST?

1. ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
2. Estimated revenue growth of 21.1% for the next 12 months implies its momentum over the last three years will continue
3. Operating margin expanded by 8.3 percentage points over the last year as it scaled and became more efficient

Toast’s stock price of $42.80 implies a valuation ratio of 4.1x forward price-to-sales. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.

High-Quality Stocks for All Market Conditions

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