From commerce to culture, software is digitizing every aspect of our lives. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 6.2% over the past six months. Investing here would have been wise - at the same time, the S&P 500 was stuck in neutral.

Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. Keeping that in mind, here are three software stocks that may face trouble.

Rapid7 (RPD)

Market Cap: $1.79 billion

Founded in 2000 with the idea that network security comes before endpoint security, Rapid7 (NASDAQ:RPD) provides software as a service that helps companies understand where they are exposed to cyber security risks, quickly detect breaches and respond to them.

Why Are We Wary of RPD?

1. Average billings growth of 4.6% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
2. Estimated sales growth of 2.5% for the next 12 months implies demand will slow from its three-year trend
3. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment

Rapid7’s stock price of $28.35 implies a valuation ratio of 2.1x forward price-to-sales. Read our free research report to see why you should think twice about including RPD in your portfolio, it’s free.

Tenable (TENB)

Market Cap: $4.34 billion

Founded in 2002 by three cybersecurity veterans, Tenable (NASDAQ:TENB) provides software as a service that helps companies understand where they are exposed to cyber security risk and how to reduce it.

Why Are We Cautious About TENB?

1. Annual revenue growth of 18.5% over the last three years was below our standards for the software sector
2. Estimated sales growth of 8.8% for the next 12 months implies demand will slow from its three-year trend
3. Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability

Tenable is trading at $36 per share, or 4.6x forward price-to-sales. Dive into our free research report to see why there are better opportunities than TENB.

Varonis (VRNS)

Market Cap: $4.50 billion

Founded by a duo of former Israeli Defense Forces cyber warfare engineers, Varonis (NASDAQ:VRNS) offers software-as-service that helps customers protect data from cyber threats and gain visibility into how enterprise data is being used.

Why Are We Hesitant About VRNS?

1. 12.2% annual revenue growth over the last three years was slower than its software peers
2. Suboptimal cost structure is highlighted by its history of operating losses
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $40.14 per share, Varonis trades at 7.2x forward price-to-sales. Check out our free in-depth research report to learn more about why VRNS doesn’t pass our bar.

Stocks We Like More

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.