Software is rapidly reducing operating expenses for businesses. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 4.7% over the past six months. Investing here would have been wise - at the same time, the S&P 500 shed 1.1% of its value.
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 three software stocks best left ignored.
Paylocity (PCTY)
Market Cap: $10.24 billion
Founded by payroll software veteran Steve Sarowitz in 1997, Paylocity (NASDAQ:PCTY) is a provider of payroll and HR software for small and medium-sized enterprises.
Why Is PCTY Not Exciting?
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Competitive market dynamics make it difficult to retain customers, leading to a weak 92% net revenue retention rate
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Estimated sales growth of 8.8% for the next 12 months implies demand will slow from its three-year trend
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Gross margin of 68.6% reflects its relatively high servicing costs
Paylocity is trading at $184.21 per share, or 6.4x forward price-to-sales. To fully understand why you should be careful with PCTY, check out our full research report (it’s free) .
Wix (WIX)
Market Cap: $9.67 billion
Founded in 2006 in Tel Aviv, Wix.com (NASDAQ:WIX) offers a free and easy to operate website building platform.
Why Does WIX Fall Short?
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11.5% annual revenue growth over the last three years was slower than its software peers
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Gross margin of 67.9% reflects its relatively high servicing costs
At $174.07 per share, Wix trades at 5.3x forward price-to-sales. Read our free research report to see why you should think twice about including WIX in your portfolio, it’s free .
BlackLine (BL)
Market Cap: $2.98 billion
Started in 2001 by software engineer Therese Tucker, one of the very few women founders who took their companies public, BlackLine (NASDAQ:BL) provides software for organizations to automate accounting and finance tasks.
Why Are We Wary of BL?
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Average billings growth of 6.7% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
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Estimated sales growth of 7.4% for the next 12 months implies demand will slow from its three-year trend
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Free cash flow margin is expected to remain in place over the coming year, indicating the company may be entering a more mature phase
BlackLine’s stock price of $48.20 implies a valuation ratio of 5x forward price-to-sales. If you’re considering BL for your portfolio, see our FREE research report to learn more .
Stocks We Like More
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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 Axon (+711% five-year return). Find your next big winner with StockStory today for free .