From commerce to culture, software is digitizing every aspect of our lives. Companies bringing it to life have been rewarded with high valuation multiples that make fundraising easier, but they have weighed on the returns lately as the industry has pulled back by 13.8% over the past six months. This drawdown is a stark contrast from the S&P 500’s 5.4% gain.
A cautious approach is imperative when dabbling in these businesses as their valuations could plummet if AI disrupts their earnings potential. Keeping that in mind, here are three software stocks best left ignored.
JFrog (FROG)
Market Cap: $4.92 billion
Named after the founders' affinity for frogs, JFrog (NASDAQ:FROG) provides a software-as-a-service platform that makes developing and releasing software easier and faster, especially for large teams.
Why Are We Wary of FROG?
- Track record of operating margin losses stem from its decision to pursue growth instead of profits
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 8.9 percentage points over the next year
JFrog’s stock price of $42.16 implies a valuation ratio of 8.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FROG.
Dropbox (DBX)
Market Cap: $7.25 billion
Founded by the long-serving CEO Drew Houston and Arash Ferdowsi in 2007, Dropbox (NASDAQ:DBX) provides a file hosting cloud platform that helps organizations collaborate and share documents.
Why Does DBX Fall Short?
- Offerings struggled to generate interest as its billings were flat over the last year
- Sales are projected to tank by 2% over the next 12 months as demand evaporates
- Efficiency has decreased over the last year as its operating margin fell by 4 percentage points
At $26.70 per share, Dropbox trades at 3x forward price-to-sales. Read our free research report to see why you should think twice about including DBX in your portfolio.
Zeta (ZETA)
Market Cap: $4.29 billion
Co-founded by former Apple CEO John Sculley, Zeta Global (NYSE:ZETA) provides software and data analytics tools that help companies market their products to billions of customers.
Why Are We Hesitant About ZETA?
- Gross margin of 60.9% reflects its relatively high servicing costs
- Operating losses show it sacrificed profitability while scaling the business
Zeta is trading at $18.07 per share, or 2.9x forward price-to-sales. Check out our free in-depth research report to learn more about why ZETA doesn’t pass our bar.
Stocks We Like More
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