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 14.2% return has topped the S&P 500 by 9.2 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. Taking that into account, here is one resilient software stock at the top of our wish list and two we’re swiping left on.

Two Software Stocks to Sell:

Health Catalyst (HCAT)

Market Cap: $311 million

Founded by healthcare professionals Tom Burton and Steve Barlow in 2008, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology to healthcare organizations, enabling them to improve care and lower costs.

Why Does HCAT Give Us Pause?

1. Sales trends were unexciting over the last three years as its 8.2% annual growth was well below the typical software company
2. Gross margin of 46.2% is way below its competitors, leaving less money to invest in areas like marketing and R&D
3. Poor expense management has led to operating losses

Health Catalyst’s stock price of $4.38 implies a valuation ratio of 0.8x forward price-to-sales. Check out our free in-depth research report to learn more about why HCAT doesn’t pass our bar.

Global Business Travel (GBTG)

Market Cap: $3.76 billion

Holding close ties to American Express, Global Business Travel (NYSE:GBTG) is a comprehensive travel and expense management services provider to corporations worldwide.

Why Are We Wary of GBTG?

1. Estimated sales growth of 4.5% for the next 12 months implies demand will slow from its three-year trend
2. Steep infrastructure costs and weaker unit economics for a software company are reflected in its low gross margin of 60.1%
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $7.01 per share, Global Business Travel trades at 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).

One Software Stock to Watch:

AppLovin (APP)

Market Cap: $88.26 billion

Co-founded by Adam Foroughi, who was frustrated with not being able to find a good solution to market his own dating app, AppLovin (NASDAQ:APP) is both a mobile game studio and provider of marketing and monetization tools for mobile app developers.

Why Does APP Stand Out?

1. Well-designed software integrates seamlessly with other workflows, enabling swift payback periods on marketing expenses and customer growth at scale
2. Disciplined cost controls and effective management resulted in a strong trailing 12-month operating margin of 39.8%, and its rise over the last year was fueled by some leverage on its fixed costs
3. Robust free cash flow margin of 44.5% gives it many options for capital deployment

AppLovin is trading at $252 per share, or 15.5x forward price-to-sales. Is now the right time to buy? See for yourself in our full research report, it’s free.

Stocks We Like Even More

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