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 20.2% over the last six months. This performance is a stark contrast from the S&P 500’s 6% gain.
Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. Keeping that in mind, here are three software stocks we’re steering clear of.
Zoom (ZM)
Market Cap: $27.42 billion
Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ: ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.
Why Do We Think ZM Will Underperform?
- Products, pricing, or go-to-market strategy may need some adjustments as its 3.9% average billings growth over the last year was weak
- Net revenue retention rate of 98% shows it has a tough time retaining customers
- Anticipated sales growth of 3.6% for the next year implies demand will be shaky
Zoom’s stock price of $92.75 implies a valuation ratio of 5.7x forward price-to-sales. Read our free research report to see why you should think twice about including ZM in your portfolio.
LiveRamp (RAMP)
Market Cap: $1.54 billion
Serving as the digital middleman in an increasingly privacy-conscious world, LiveRamp (NYSE: RAMP) provides technology that helps companies securely share and connect their customer data with trusted partners while maintaining privacy compliance.
Why Does RAMP Fall Short?
- Underwhelming ARR growth of 6.8% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Customers generally do not adopt complementary products as its 104% net revenue retention rate lags behind the industry standard
- Estimated sales growth of 9% for the next 12 months implies demand will slow from its two-year trend
LiveRamp is trading at $24.26 per share, or 1.8x forward price-to-sales. If you’re considering RAMP for your portfolio, see our FREE research report to learn more.
Manhattan Associates (MANH)
Market Cap: $8.41 billion
Built on a "versionless" cloud architecture that delivers quarterly updates to all customers, Manhattan Associates (NASDAQ: MANH) develops cloud-based software that helps retailers, wholesalers, and manufacturers manage their supply chains, inventory, and omnichannel operations.
Why Are We Hesitant About MANH?
- Average billings growth of 4.1% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Gross margin of 56.3% reflects its high servicing costs
- Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses
At $140.41 per share, Manhattan Associates trades at 7.4x forward price-to-sales. To fully understand why you should be careful with MANH, check out our full research report (it’s free).
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