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 18.2% gain over the past six months, beating the S&P 500 by 13.2 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:
Alarm.com (ALRM)
Market Cap: $2.9 billion
Founded in 2000 as a business unit within MicroStrategy, Alarm.com (NASDAQ:ALRM) is a software-as-a-service platform that enables users to control their security systems and smart home appliances from a single app.
Why Are We Wary of ALRM?
- Products, pricing, or go-to-market strategy may need some adjustments as its 6.5% average billings growth over the last year was weak
- Estimated sales growth of 4.3% 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 65.3% that must be offset through higher consumption volumes
Alarm.com is trading at $58.54 per share, or 3.6x forward price-to-sales. Read our free research report to see why you should think twice about including ALRM in your portfolio.
Teradata (TDC)
Market Cap: $2.2 billion
Part of point-of-sale and ATM company NCR from 1991 to 2007, Teradata (NYSE:TDC) offers a software-as-service platform that helps organizations manage their data across multiple storages and analyze it.
Why Should You Sell TDC?
- Offerings couldn’t generate interest over the last year as its billings have averaged 6.1% declines
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 60.6%
Teradata’s stock price of $23.09 implies a valuation ratio of 1.4x forward price-to-sales. Check out our free in-depth research report to learn more about why TDC doesn’t pass our bar.
One Software Stock to Buy:
Datadog (DDOG)
Market Cap: $39.58 billion
Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ:DDOG) is a software-as-a-service platform that makes it easier to monitor cloud infrastructure and applications.
Why Should You Buy DDOG?
- ARR growth averaged 31.2% over the last year, showing customers are willing to take multi-year bets on its offerings
- Well-designed software integrates seamlessly with other workflows, enabling swift payback periods on marketing expenses and customer growth at scale
- DDOG is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
At $116.58 per share, Datadog trades at 13x forward price-to-sales. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
Put yourself in the driver’s seat by checking out our Top 6 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.
