3 Reasons to Sell AGYS and 1 Stock to Buy Instead

Agilysys’s stock price has taken a beating over the past six months, shedding 21.6% of its value and falling to $109.08 per share. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Agilysys, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Agilysys Not Exciting?

Despite the more favorable entry price, we're swiping left on Agilysys for now. Here are three reasons why you should be careful with AGYS and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Agilysys grew its sales at a 19.2% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

2. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Agilysys, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Agilysys’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 62.4% gross margin over the last year. That means Agilysys paid its providers a lot of money ($37.60 for every $100 in revenue) to run its business.

3. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Agilysys’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 19% for the last 12 months will decrease to 26.2%.

Final Judgment

Agilysys isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 10× forward price-to-sales (or $109.08 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.

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