Software is rapidly reducing operating expenses for businesses. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have capped returns lately as the industry was flat over the past six months and trailed the S&P 500’s 13.6% gain.
While some can support their premium valuations with superior earnings growth, the odds aren’t great for the businesses we’re analyzing today. On that note, here are three software stocks we’re swiping left on.
Adobe (ADBE)
Market Cap: $148.5 billion
Originally named after Adobe Creek that ran behind co-founder John Warnock's house, Adobe (NASDAQ: ADBE) develops software products used for digital content creation, document management, and marketing solutions across desktop, mobile, and cloud platforms.
Why Are We Wary of ADBE?
- Offerings struggled to generate meaningful interest as its average billings growth of 12.6% over the last year did not impress
- Anticipated sales growth of 9.4% for the next year implies demand will be shaky
- Operating margin expanded by 5.3 percentage points over the last year as it scaled and became more efficient
At $355.50 per share, Adobe trades at 5.6x forward price-to-sales. Read our free research report to see why you should think twice about including ADBE in your portfolio.
Box (BOX)
Market Cap: $4.32 billion
Known as the "Content Cloud" for managing the 90% of business data that exists as unstructured files and documents, Box (NYSE: BOX) provides a cloud-based platform that enables organizations to securely manage, share, and collaborate on their content from anywhere on any device.
Why Does BOX Worry Us?
- Average billings growth of 11.9% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 7.7% for the next 12 months is soft and implies weaker demand
- Efficiency has decreased over the last year as its operating margin fell by 1.6 percentage points
Box is trading at $30.07 per share, or 3.6x forward price-to-sales. To fully understand why you should be careful with BOX, check out our full research report (it’s free for active Edge members).
Wix (WIX)
Market Cap: $5.69 billion
Powering over 263 million registered users worldwide with its AI-driven tools, Wix (NASDAQ: WIX) provides a cloud-based platform that helps individuals and businesses create and manage professional websites without requiring coding skills.
Why Does WIX Give Us Pause?
- Average billings growth of 13.7% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Operating profits and efficiency rose over the last year as it benefited from some fixed cost leverage
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.7 percentage points
Wix’s stock price of $103.89 implies a valuation ratio of 2.6x forward price-to-sales. If you’re considering WIX for your portfolio, see our FREE research report to learn more.
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