1 software stock with a promising outlook and 2 we avoid
Software is rapidly reducing operating costs for companies. Companies that launch it have been rewarded with high valuation metrics that make fundraising easier, but they have capped returns lately as the industry has been stagnant over the past six months, lagging the S&P 500’s 7.7% rise.
A cautious approach is essential when entering these businesses, as the best companies deliver robust profit growth while the rest are disrupted by competition and AI. With that in mind, here’s a robust software stock at the top of our wish list and two that we’re passing on.
Table of Contents
Two software stocks for sale:
Domo (DOMO)
Market cap: $133.6 million
Named after the Japanese word meaning “thank you,” Domo (NASDAQ:DOMO) offers a cloud-based business intelligence platform that connects people across organizations with real-time data and insights.
Why is DOMO risky?
Customers had concerns about choosing the platform last year as average billing growth of 1.3% was disappointing
The forecast sales decline of 1.7% for the next 12 months suggests an even tougher demand environment
The competitive market means the company has to invest more in sales and marketing to stand out from the competition, even if the return on investment is low
Domo trades at $3.52 per share, a 0.5x price-to-sales ratio. If you’re considering DOMO for your portfolio, read our FREE research report to learn more.
Asure Software (ASUR)
Market cap: $248.7 million
Asure Software (NASDAQ:ASUR) operates in often-overlooked smaller metropolitan markets where HR expertise is lacking, providing cloud-based human capital management software and services that help small and medium-sized businesses manage payroll, taxes, time tracking and HR compliance.
Why are we suspicious of ASUR?
Revenue performance over the last two years hasn’t been particularly exciting, with annual growth of 12.3%, below that of a typical software company
Estimated sales growth of 10.4% for the next 12 months suggests demand will moderate from its two-year trend
The low free cash flow margin of 5.3% last year limits the company’s freedom to invest in growth initiatives, conduct share buybacks or pay dividends
At $8.27 per share, Asure Software trades at a forward price-to-sales ratio of 1.4 times. Read our free research report to learn why you should think twice about adding ASUR to your portfolio because it’s free.
A software stock to keep an eye on:
Dynatrace (DT)
Market cap: $11.77 billion
With its platform processing over 30 trillion IT performance data daily, Dynatrace (NYSE:DT) offers an AI-powered platform that helps organizations monitor, secure and optimize their applications and IT infrastructure in cloud environments.
Why does DT stand out?
The average sales growth of 24% over the last year increases the company’s liquidity and shows that there is a steady demand for its products
Software is difficult to replicate at scale and results in a best-in-class gross margin of 81.7%.
The robust free cash flow margin of 26.2% offers many options for capital deployment
Dynatrace’s share price of $44.77 implies a valuation ratio of 5.7x expected price-to-sales. Is now the time to open a position? Find out in our full research report, it’s free.
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https://finance.yahoo.com/markets/stocks/articles/1-software-stock-promising-prospects-112401251.html
