3 Software Companies We Prefer to Avoid

The Changing Landscape of Software Stocks

Software solutions continue to help companies cut costs, but the sector’s fortunes have shifted. Previously, strong momentum in the SaaS industry led to high valuations and easier fundraising. However, these elevated prices also meant greater risk, and over the past six months, software stocks have fallen by 23.6%, a sharp contrast to the S&P 500’s 7.2% gain.

Why Investors Should Be Selective

With artificial intelligence and increased competition making many software offerings less unique, not every company deserves its current valuation. Here are three software stocks we believe investors should avoid right now.

Bandwidth (BAND)

Market Capitalization: $464.8 million

Bandwidth (NASDAQ:BAND) supplies cloud-based communications tools and APIs, enabling major tech firms like Microsoft, Google, and Zoom to integrate voice, messaging, and emergency services into their platforms.

Concerns About BAND

• Revenue growth averaged just 12% annually over the past two years, lagging behind industry peers.
• High service costs have resulted in a modest gross margin of 39.1%, which requires higher usage to offset.
• The company’s operating margin remained unchanged last year, indicating no improvement in operational efficiency.

BAND is currently priced at $14.54 per share, trading at 0.5 times its projected sales.

Five9 (FIVN)

Market Capitalization: $1.43 billion

Five9 (NASDAQ:FIVN), named after the telecommunications standard for 99.999% uptime, offers cloud-based software that helps businesses manage contact centers and customer interactions across multiple channels.

Reasons to Be Cautious with FIVN

• Customer hesitation led to only 9.1% growth in average billings last year, which was disappointing.
• Projected sales growth for the next year is just 9.3%, suggesting a slowdown compared to previous years.
• Gross margin stands at 55.3%, reflecting significant servicing expenses.

Five9 shares trade at $18.27, equating to a forward price-to-sales ratio of 1.2.

ZoomInfo (GTM)

Market Capitalization: $1.95 billion

ZoomInfo (NASDAQ:GTM) operates "RevOS" (Revenue Operating System), a platform that equips sales, marketing, and recruiting teams with analytics and business intelligence to target and engage potential clients.

Why GTM May Struggle

• Interest in its products has waned, with billings remaining flat over the past year.
• Analysts expect revenue to stay stagnant in the coming 12 months, signaling weak demand.
• Free cash flow margin is projected to decline by 4.6 percentage points, indicating the company may need to spend more to keep pace with competitors.

ZoomInfo is valued at $6.38 per share, or 1.5 times forward sales.

Stocks with Greater Potential

Relying on just a handful of stocks can leave your investments vulnerable. Now is the time to secure high-quality companies before the market broadens and current opportunities fade.

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