Software is rapidly reducing operating expenses for businesses. The undeniable tailwinds fueling SaaS companies have led to lofty valuation multiples historically, but rich prices also make re-ratings harder and place a ceiling on returns - over the past six months, the industry’s 13.3% gain has lagged the S&P 500 by 4.4 percentage points.
While some can support their premium valuations with superior earnings growth, the odds aren’t great for the businesses we’re analyzing today. Taking that into account, here are three software stocks best left ignored.
LiveRamp (RAMP)
Market Cap: $1.77 billion
Serving as the digital middleman in an increasingly privacy-conscious world, LiveRamp (NYSE:RAMP) provides technology that helps companies securely share and connect their customer data with trusted partners while maintaining privacy compliance.
Why Does RAMP Fall Short?
- 11.5% annual revenue growth over the last three years was slower than its software peers
- Underwhelming ARR growth of 8.9% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Estimated sales growth of 7.7% for the next 12 months implies demand will slow from its three-year trend
LiveRamp’s stock price of $27.03 implies a valuation ratio of 2.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than RAMP.
SoundHound AI (SOUN)
Market Cap: $5.94 billion
Born from the idea that machines should understand human speech as naturally as people do, SoundHound AI (NASDAQ:SOUN) develops voice recognition and conversational intelligence technology that enables businesses to integrate voice assistants into their products and services.
Why Are We Cautious About SOUN?
- Gross margin of 40.5% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Operating margin fell by 43.6 percentage points over the last year as it prioritized growth over profits
- Negative free cash flow raises questions about the return timeline for its investments
At $14.55 per share, SoundHound AI trades at 31.2x forward price-to-sales. Check out our free in-depth research report to learn more about why SOUN doesn’t pass our bar.
Integral Ad Science (IAS)
Market Cap: $1.44 billion
Processing over 280 billion digital ad interactions daily through its AI-powered technology, Integral Ad Science (NASDAQ:IAS) provides a cloud-based platform that measures and verifies digital advertising across devices, channels, and formats to ensure ads are viewable, fraud-free, and brand-safe.
Why Are We Wary of IAS?
- Sales trends were unexciting over the last three years as its 15.4% annual growth was below the typical software company
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 6.7 percentage points
Integral Ad Science is trading at $8.68 per share, or 2.3x forward price-to-sales. Read our free research report to see why you should think twice about including IAS in your portfolio.
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