Software is eating the world, and virtually no business is left untouched by it. Companies bringing it to life have been rewarded with explosive earnings growth, and the upward trend shows no signs of stopping as the industry has posted a 18.1% gain over the past six months, beating the S&P 500 by 12.8 percentage points.
Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. With that said, here is one software stock poised to generate sustainable market-beating returns and two that may face trouble.
Two Software Stocks to Sell:
Flywire (FLYW)
Market Cap: $1.32 billion
Originally created to process international tuition payments for universities, Flywire (NASDAQ:FLYW) is a cross border payments processor and software platform focusing on complex, high-value transactions like education, healthcare and B2B payments.
Why Does FLYW Worry Us?
- High servicing costs result in a relatively inferior gross margin of 63.7% that must be offset through higher consumption volumes
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Operating losses show it sacrificed profitability while scaling the business
Flywire’s stock price of $10.80 implies a valuation ratio of 2.4x forward price-to-sales. Read our free research report to see why you should think twice about including FLYW in your portfolio.
Zeta (ZETA)
Market Cap: $4.01 billion
Co-founded by former Apple CEO John Sculley, Zeta Global (NYSE:ZETA) provides software and data analytics tools that help companies market their products to billions of customers.
Why Are We Hesitant About ZETA?
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 97% net revenue retention rate
- Gross margin of 60.3% reflects its relatively high servicing costs
- Track record of operating losses stem from its decision to pursue growth instead of profits
Zeta is trading at $17.21 per share, or 3.4x forward price-to-sales. If you’re considering ZETA for your portfolio, see our FREE research report to learn more.
One Software Stock to Watch:
Braze (BRZE)
Market Cap: $3.71 billion
Founded in 2011 after the co-founders met at NYC Disrupt Hackathon, Braze (NASDAQ:BRZE) is a customer engagement software platform that allows brands to connect with customers through data-driven and contextual marketing campaigns.
Why Could BRZE Be a Winner?
- ARR growth averaged 29.5% over the last year, showing customers are willing to take multi-year bets on its offerings
- High switching costs and customer loyalty are evident in its net revenue retention rate of 115%
- Operating margin expanded by 10.3 percentage points over the last year as it scaled and became more efficient
At $37.48 per share, Braze trades at 5.5x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
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