Software is eating the world, and virtually no business is left untouched by it. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 6.2% over the past six months. Investing here would have been wise - at the same time, the S&P 500 was stuck in neutral.
However, only a handful of companies will ultimately thrive over the long term as the low barriers to entry for software businesses lead to fierce competition. With that said, here are two software stocks we think can generate sustainable market-beating returns and one we’re swiping left on.
One Software Stock to Sell:
Guidewire (GWRE)
Market Cap: $15.59 billion
Founded by two individuals involved in the development of leading procurement software Ariba, Guidewire (NYSE: GWRE) offers insurance companies a software-as-a-service platform to help sell their products and manage their workflows.
Why Are We Wary of GWRE?
- Revenue increased by 12.4% annually over the last three years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- High servicing costs result in a relatively inferior gross margin of 61.4% that must be offset through increased usage
- Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
Guidewire is trading at $185.21 per share, or 12.4x forward price-to-sales. Check out our free in-depth research report to learn more about why GWRE doesn’t pass our bar.
Two Software Stocks to Watch:
HubSpot (HUBS)
Market Cap: $31.77 billion
Started in 2006 by two MIT grad students, HubSpot (NYSE: HUBS) is a software-as-a-service platform that helps small and medium-sized businesses market themselves, sell, and get found on the internet.
Why Do We Like HUBS?
- ARR growth averaged 20.7% over the last year, showing customers are willing to take multi-year bets on its offerings
- Prominent and differentiated software culminates in a best-in-class gross margin of 85%
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
At $611 per share, HubSpot trades at 10.6x forward price-to-sales. Is now the right time to buy? See for yourself in our full research report, it’s free.
Doximity (DOCS)
Market Cap: $11.89 billion
Founded in 2010 and named for a combination of “docs” and “proximity”, Doximity (NYSE: DOCS) is the leading social network for U.S. medical professionals.
Why Are We Bullish on DOCS?
- Billings have averaged 20.3% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
Doximity’s stock price of $63.40 implies a valuation ratio of 20.8x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
Stocks We Like Even More
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