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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 7.3% over the last six months. This drop was worse than the S&P 500’s 4.7% fall.
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: $23.88 billion
Started by Eric Yuan who once ran engineering for Cisco’s video conferencing business, Zoom (NASDAQ:ZM) offers an easy to use, cloud-based platform for video conferencing, audio conferencing and screen sharing.
Why Are We Cautious About ZM?
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Average ARR growth of 3.1% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
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Estimated sales growth of 2.5% for the next 12 months implies demand will slow from its three-year trend
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Projected 5 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Zoom is trading at $78.21 per share, or 5.2x forward price-to-sales. Read our free research report to see why you should think twice about including ZM in your portfolio, it’s free.
8x8 (EGHT)
Market Cap: $235.7 million
Founded in 1987, 8x8 (NYSE:EGHT) provides software for organizations to efficiently communicate and collaborate with their customers, employees, and partners.
Why Should You Dump EGHT?
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Billings have dropped by 2.1% over the last year, suggesting it might have to lower prices to stimulate growth
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Sales are projected to remain flat over the next 12 months as demand decelerates from its three-year trend
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Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
At $1.87 per share, 8x8 trades at 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why EGHT doesn’t pass our bar.
Agilysys (AGYS)
Market Cap: $2.11 billion
Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ:AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.
Why Are We Hesitant About AGYS?
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High servicing costs result in a relatively inferior gross margin of 62.7% that must be offset through increased usage
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Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 4.6 percentage points