From commerce to culture, software is digitizing every aspect of our lives. The undeniable tailwinds fueling the industry have also tempered losses for SaaS stocks over the past six months as their 2.8% drawdown was relatively better than the S&P 500’s 5.9% decline.
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 is one software stock boasting a durable advantage and two that may face trouble.
Two Software Stocks to Sell:
Elastic (ESTC)
Market Cap: $8.57 billion
Started by Shay Banon as a search engine for his wife's growing list of recipes at Le Cordon Bleu cooking school in Paris, Elastic (NYSE: ESTC) helps companies integrate search into their products and monitor their cloud infrastructure.
Why Are We Hesitant About ESTC?
- Suboptimal cost structure is highlighted by its history of operating losses
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.3 percentage points
Elastic is trading at $84.99 per share, or 5.3x forward price-to-sales. If you’re considering ESTC for your portfolio, see our FREE research report to learn more.
nCino (NCNO)
Market Cap: $2.70 billion
Founded in 2011 in North Carolina, nCino (NASDAQ: NCNO) makes cloud-based operating systems for banks and provides that software-as-a-service.
Why Are We Wary of NCNO?
- Estimated sales growth of 6.6% for the next 12 months implies demand will slow from its three-year trend
- High servicing costs result in a relatively inferior gross margin of 60.1% that must be offset through increased usage
- Rapid expansion strategy came at the expense of operating profitability
nCino’s stock price of $23.66 implies a valuation ratio of 4.7x forward price-to-sales. Read our free research report to see why you should think twice about including NCNO in your portfolio.
One Software Stock to Buy:
Shopify (SHOP)
Market Cap: $123.2 billion
Originally created as an internal tool for a snowboarding company, Shopify (NYSE: SHOP) provides a software platform for building and operating e-commerce businesses.
Why Are We Backing SHOP?
- Payment activity on its platform is soaring as its TPV growth averaged 32% over the last year, enabling the company to collect more fees and upsell additional services like banking
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
- Operating margin expanded by 32.2 percentage points over the last year as it scaled and became more efficient
At $94.50 per share, Shopify trades at 11.5x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.
