Software is rapidly reducing operating expenses for businesses. 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 25.1% over the last six months. This drawdown was seriously discouraging since the S&P 500 held steady.
A cautious approach is imperative when dabbling in these businesses as the best will deliver robust earnings growth while the rest will be disrupted by competition and AI. With that said, here is one software stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Software Stocks to Sell:
Paylocity (PCTY)
Market Cap: $5.97 billion
Operating in a field where companies traditionally juggled multiple disconnected systems, Paylocity (NASDAQ: PCTY) provides cloud-based human capital management and payroll software solutions that help businesses manage their workforce and HR processes.
Why Are We Cautious About PCTY?
- Underwhelming ARR growth of 13% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Estimated sales growth of 7% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 1.4 percentage points over the last year as it scaled and became more efficient
At $110.91 per share, Paylocity trades at 3.3x forward price-to-sales. Check out our free in-depth research report to learn more about why PCTY doesn’t pass our bar.
DoubleVerify (DV)
Market Cap: $1.63 billion
Using advanced analytics to evaluate over 17 billion digital ad transactions daily, DoubleVerify (NYSE: DV) provides AI-powered technology that verifies digital ads are viewable, fraud-free, brand-suitable, and displayed in the intended geographic location.
Why Does DV Fall Short?
- Revenue increased by 14.3% annually over the last two years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 2 percentage points
DoubleVerify is trading at $10.04 per share, or 2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than DV.
One Software Stock to Buy:
Guidewire Software (GWRE)
Market Cap: $13.21 billion
With its systems powering the operations of hundreds of insurance brands across 42 countries, Guidewire Software (NYSE: GWRE) provides a technology platform that helps property and casualty insurance companies manage their core operations, digital engagement, and analytics.
Why Are We Backing GWRE?
- Billings growth has averaged 21.1% over the last year, indicating a healthy pipeline of new contracts that should drive future revenue increases
- Well-designed software integrates seamlessly with other workflows, enabling swift payback periods on marketing expenses and customer growth at scale
- Has the option to reinvest or return capital to investors as its 21.9% free cash flow margin is well above its peers
Guidewire Software’s stock price of $156 implies a valuation ratio of 8.8x 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
WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don't just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.
But our AI platform says the party isn't over. Find out which 9 stocks made the cut this week — FREE. Get Our Top 9 Market-Beating Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.
