From commerce to culture, software is digitizing every aspect of our lives. This secular theme has materialized in superior earnings growth and stock price performance for most SaaS companies, and over the last six months, the industry’s 13.5% return has topped the S&P 500 by 8.6 percentage points.
However, only a handful of companies will ultimately thrive over the long term as the low barriers to entry for software businesses lead to fierce competition. With that said, here are two software stocks boasting durable advantages and one we’re steering clear of.
One Software Stock to Sell:
American Express Global Business Travel (GBTG)
Market Cap: $4.92 billion
Originally spun off from American Express in 2014 but maintaining the Amex GBT brand, Global Business Travel Group (NYSE:GBTG) provides end-to-end business travel and expense management solutions, connecting corporate clients with travel suppliers and offering specialized software services.
Why Are We Hesitant About GBTG?
- Annual revenue growth of 12.5% over the last two years was below our standards for the software sector
- Gross margin of 59% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Efficiency has decreased over the last year as its operating margin fell by 3.7 percentage points
American Express Global Business Travel is trading at $9.42 per share, or 1.5x forward price-to-sales. To fully understand why you should be careful with GBTG, check out our full research report (it’s free).
Two Software Stocks to Watch:
The Trade Desk (TTD)
Market Cap: $8.59 billion
Built as an alternative to "walled garden" advertising ecosystems, The Trade Desk (NASDAQ:TTD) provides a cloud-based platform that helps advertisers and agencies plan, manage, and optimize digital advertising campaigns across multiple channels and devices.
Why Does TTD Stand Out?
- Impressive 20.2% annual revenue growth over the last two years indicates it’s winning market share
- Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently
- Highly efficient business model is illustrated by its impressive 20.3% operating margin, and it turbocharged its profits by achieving some fixed cost leverage
The Trade Desk’s stock price of $18.36 implies a valuation ratio of 2.8x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
Veeva Systems (VEEV)
Market Cap: $32.74 billion
Originally named "Verticals onDemand" before rebranding in 2009, Veeva Systems (NYSE:VEEV) provides cloud software, data solutions, and consulting services that help life sciences companies develop and bring products to market more efficiently.
Why Do We Like VEEV?
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
- Excellent operating margin of 28.8% highlights the efficiency of its business model, and its profits increased over the last year as it scaled
- Robust free cash flow margin of 49.4% gives it many options for capital deployment
At $203.50 per share, Veeva Systems trades at 9.2x forward price-to-sales. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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