1 Software Stock with Competitive Advantages and 2 to Approach with Caution

From commerce to culture, software is digitizing every aspect of our lives. 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 8.8% over the last six months. This drop was disheartening since the S&P 500 stood firm.

Investors should tread carefully as only some businesses are worthy of their valuations, and luckily for you, we started StockStory to help you find them. On that note, here is one resilient software stock at the top of our wish list and two we’re swiping left on.

Two SoftwareStocks to Sell:

C3.ai (AI)

Market Cap: $3.23 billion

Founded in 2009 by enterprise software veteran Tom Seibel, C3.ai (NYSE:AI) provides software that makes it easy for organizations to add artificial intelligence technology to their applications.

Why Are We Wary of AI?

1. Annual revenue growth of 15.5% over the last three years was below our standards for the software sector
2. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
3. Poor expense management has led to operating margin losses

At $24.25 per share, C3.ai trades at 7x forward price-to-sales. Read our free research report to see why you should think twice about including AI in your portfolio.

Rapid7 (RPD)

Market Cap: $1.52 billion

Founded in 2000 with the idea that network security comes before endpoint security, Rapid7 (NASDAQ:RPD) provides software as a service that helps companies understand where they are exposed to cyber security risks, quickly detect breaches and respond to them.

Why Are We Out on RPD?

1. Offerings struggled to generate meaningful interest as its average billings growth of 4.6% over the last year did not impress
2. Estimated sales growth of 2.1% for the next 12 months implies demand will slow from its three-year trend
3. Projected 2.5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

Rapid7 is trading at $23.73 per share, or 1.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than RPD.

One Software Stock to Watch:

Autodesk (ADSK)

Market Cap: $63.88 billion

Founded in 1982 by John Walker and growing into one of the industry's behemoths, Autodesk (NASDAQ:ADSK) makes computer-aided design (CAD) software for engineering, construction, and architecture companies.

Why Does ADSK Stand Out?

1. Billings growth has averaged 23.1% over the last year, indicating a healthy pipeline of new contracts that should drive future revenue increases
2. Software is difficult to replicate at scale and leads to a best-in-class gross margin of 92%
3. Excellent operating margin of 20.3% highlights the efficiency of its business model

Autodesk’s stock price of $297.02 implies a valuation ratio of 9x forward price-to-sales. Is now the time to initiate a position? See for yourself in our full research report, it’s free.

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