3 Software Stocks in the Doghouse

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 10.2% over the last six months. This performance was worse than the S&P 500’s 3.3% decline.

A cautious approach is imperative when dabbling in these businesses as their valuations could plummet if AI disrupts their earnings potential. On that note, here are three software stocks best left ignored.

MongoDB (MDB)

Market Cap: $15.09 billion

Started in 2007 by the team behind Google’s ad platform, DoubleClick, MongoDB offers database-as-a-service that helps companies store large volumes of semi-structured data.

Why Does MDB Worry Us?

1. Drawn-out sales process reflects its software’s integration hurdles with enterprise clients, restraining customer growth potential
2. Rapid expansion strategy came at the expense of operating profitability
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.7% for the last year

MongoDB’s stock price of $185.50 implies a valuation ratio of 6.9x forward price-to-sales. To fully understand why you should be careful with MDB, check out our full research report (it’s free).

Unity (U)

Market Cap: $8.63 billion

Started as a game studio by three friends in a Copenhagen apartment, Unity (NYSE:U) is a software as a service platform that makes it easier to develop and monetize new games and other visual digital experiences.

Why Do We Think Twice About U?

1. Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 10.2% declines over the last year
2. Net revenue retention rate of 96% shows it has a tough time retaining customers
3. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions

Unity is trading at $20.72 per share, or 4.8x forward price-to-sales. Read our free research report to see why you should think twice about including U in your portfolio.

GoDaddy (GDDY)

Market Cap: $26.05 billion

Founded by Bob Parsons after selling his first company to Intuit, GoDaddy (NYSE:GDDY) provides small and mid-sized businesses with the ability to buy a web domain and tools to create and manage a website.

Why Is GDDY Not Exciting?

1. ARR growth averaged a weak 7.8% over the last year, suggesting that competition is pulling some attention away from its software
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 7.1%
3. Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 64%

At $182.36 per share, GoDaddy trades at 5.3x forward price-to-sales. If you’re considering GDDY for your portfolio, see our FREE research report to learn more.

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