In 2020, enterprise software became an investor favorite. However, over the past few weeks, tech stocks have entered shaky grounds. As the global economy pulls itself back on track, investors are rotating away from pricey technology stocks in favor of non-tech stocks that have been lying low amid the pandemic. Widespread profit taking and increasing bond yields have caused the sector to exhibit some weakness.
Viewing things from a long-term perspective, the enterprise software industry holds immense potential because pandemic-driven trends are expected to continue even in the post-pandemic world. Indeed, Gartner expects global IT spending to grow 6.2% this year to $3.9 trillion.
That said, investors must be judicious in picking software stocks. There are many stocks for which their high valuation multiples are unjustified given their weak fundamentals.
Bill.Com Holdings, Inc. (BILL), Coupa Software Incorporated (COUP), MongoDB, Inc. (MDB), and Lightspeed POS Inc. (LSPD) are four such software companies. We think investors should avoid them now.
Click here to check out our Software Industry Report for 2021
Bill.Com Holdings, Inc. (BILL)
BILL provides cloud-based software solutions. It simplifies, digitizes, and automates complex back-office financial operations for SMBs. BILL’s software helps customers to generate and process invoices, streamline approvals, send and receive payments, sync with their accounting system, and manage their cash.
During the second quarter, ended December 31, 2020, BILL climbed 38% year-over-year to $54 million. Its core revenue, which includes subscription and transaction fees, rose 59% to $52.3 million. Simultaneously, its subscription fees increased to $26.6 million. Its loss per share contracted to $0.21 from $0.34 posted in the same period last year. Conversely, its loss from operations expanded to $14.2 million from $7.9 million due to rise in research and development expenses. While BILL is on a growth trajectory thanks to its robust financials, it also has a stretched valuation now. Its ev/sales ratio of 61.30x is much higher than the industry average 4.70x.
Analysts expect BILL’s revenue for the quarter ended June 30, 2021 to be $57.2 million, representing a 35.9% increase year-over-year. Its EPS is likely to grow at the rate of 30% per annum over the next five years.
BILL ended yesterday’s trading session at $151.96, surging 287.4% over the past year. During the past six months, BILL climbed 59.7%.
BILL’s POWR Ratings represent a bleak picture. The stock has an overall F rating, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
It has an F grade for Value and a D grade for Growth and Stability. It is ranked #109 of 114 stocks in the D-rated Software - Application industry.
Click here to see the additional POWR Ratings for BILL (Momentum, Quality, and Sentiment).
Coupa Software Incorporated (COUP)
COUP markets a cloud-based spend management platform that connects organizations with suppliers globally and provides greater visibility and control over how companies spend money. It also helps businesses to achieve savings to drive profitability.
COUP’s revenue during the fourth quarter, ended January 31, 2020, increased 47% year-over-year to $163.5 million. Its subscription revenues rose 37% to $134.9 million. However, the company’s operating loss expanded to $95.4 million from $15.9 million. Its loss per share also expanded to $0.85 from $0.38 posted in the prior-year period.
Analysts expect COUP’s revenue for the year ending January 31, 2022 to be $679 million, representing a 25.4% increase year-over-year. Its EPS is likely to climb at the rate of 24.9% per annum over the next five years.
Over the past year, COUP has advanced 75.9% to end yesterday’s trading session at $258.04. During the past six months, the stock has declined 7.3%. However, since the beginning of 2021, COUP has already lost 26.6%. One of the major reasons behind this is its CEO Robert Bernshteyn sale of 50,000 shares last week, at the average price of $254.29. Furthermore, in terms of forward ev/sales, COUP is currently trading at 28.06x, which is much higher than the industry average 4.36x.
COUP has an overall F rating, which equates to Strong Sell in our proprietary rating system. COUP has a D grade for Growth, Stability, and Value. It is ranked #61 of 61 stocks in the C-rated Software - Business industry.
Click here to see the additional POWR Ratings for COUP (Momentum, Sentiment, and Quality).
MongoDB, Inc. - (MDB)
MDB operates as a general-purpose database platform worldwide that offers MongoDB Enterprise Advanced, a subscription package for enterprise customers to run in the cloud or in a hybrid environment. The company also offers professional services, such as consulting and training, to segments including financial services, government, healthcare, media and entertainment, and retail.
MDB’s loss for the fourth quarter, ended January 30, 2021, expanded to $1.25 from $1.10 posted in the same period last year. Its total revenue for the quarter climbed 38% year-over-year to $171 million. Its subscription revenue increased 39% to $163.9 million. MDB ended the quarter with a negative free cash flow of $20.7 million. MDB stock is also quite pricey currently. Its valuation doesn’t justify its fundamentals. Its forward ev/sales ratio is 31.36x, which is much higher than the industry average 4.70x.
Analysts expect MDB’s revenue for the year ending January 31, 2022 to be $761.45 million, representing a 29% increase year-over-year. Its loss per share is likely to expand 184.6% to $0.37.
MDB has surged 151.2% during the past year to close yesterday’s session at $309.77. Over the past six months, the stock has gained 35.8%.
MDB’s gloomy prospects are reflected in its POWR Ratings. The stock has an overall D rating, which translates to a Strong Sell in our proprietary rating system. MDB has a D grade for Growth, Value and Stability also. Within the Software - Application industry, it is ranked #104.
In addition to the POWR Ratings grades we’ve just highlighted, one can see MDB’s ratings for Sentiment, Quality and Momentum here.
Lightspeed POS Inc. (LSPD)
LSPD offers e-commerce, payment processing, accounting, multi-location management, and reporting and analysis solutions through its cloud-based point of sale (POS) systems. LSPD’s revenue for the third quarter, ended December 31, 2020, climbed 79% year-over-year to $57.6 million. Its recurring software and payments revenue surged 85% over the year to $52.5 million. And its gross Transaction Volume grew 48% over the year to $9.1 billion. However, the company is still incurring losses. Its loss per share expanded to $0.39 from $0.18 posted in the prior-year period.
LSPD ended yesterday’s trading session at $65.63, surging 599.2% over the past year. During the past six months, LSPD climbed 115.7%.
LSPD’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating which translates to Strong Sell in our proprietary rating system. It also has an F grade for Value, and D for Growth and Quality. It is ranked #58 of 61 stocks in the C-rated Software - Business industry.
Click here to see the additional POWR Ratings for LSPD (Momentum Sentiment, and Stability).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Click here to check out our Software Industry Report for 2021
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BILL shares were trading at $156.26 per share on Tuesday afternoon, up $4.30 (+2.83%). Year-to-date, BILL has gained 14.48%, versus a 4.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education.
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