Software is rapidly reducing operating expenses for businesses. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 3.1%. This performance was discouraging since the S&P 500 returned 4.5%.
A cautious approach is imperative when dabbling in these businesses as the best will deliver robust earnings growth while the rest will be disrupted by competition and AI. Keeping that in mind, here are two software stocks we think can generate sustainable market-beating returns and one we’re swiping left on.
One SoftwareStock to Sell:
Fastly (FSLY)
Market Cap: $987.5 million
Founded in 2011, Fastly (NYSE:FSLY) provides content delivery and edge cloud computing services, enabling enterprises and developers to deliver fast, secure, and scalable digital content and experiences.
Why Is FSLY Risky?
- Sales trends were unexciting over the last three years as its 14.3% annual growth was below the typical software company
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 54%, one of the worst among software companies
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $6.85 per share, Fastly trades at 1.6x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FSLY.
Two Software Stocks to Watch:
Datadog (DDOG)
Market Cap: $48.13 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 Is DDOG a Good Business?
- ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
- Strong free cash flow margin of 29.4% enables it to reinvest or return capital consistently
Datadog is trading at $139.01 per share, or 15x forward price-to-sales. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
Workiva (WK)
Market Cap: $3.66 billion
Founded in 2010, Workiva (NYSE:WK) offers software as a service product that makes financial and compliance reporting easier, especially for publicly traded corporations.
Why Are We Fans of WK?
- ARR growth averaged 19.5% over the last year, showing customers are willing to take multi-year bets on its offerings
- Estimated revenue growth of 16.9% for the next 12 months implies better momentum than most peers
- Software is difficult to replicate at scale and results in a stellar gross margin of 76.7%
Workiva’s stock price of $66.98 implies a valuation ratio of 4.1x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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