From commerce to culture, software is digitizing every aspect of our lives. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 25.2%. This drop was especially discouraging since the S&P 500 held its ground.
A cautious approach is imperative when dabbling in these businesses as the best will deliver robust earnings growth while the rest will be disrupted by competition and AI. Taking that into account, here is one software stock boasting a durable advantage and two we’re steering clear of.
Two Software Stocks to Sell:
Elastic (ESTC)
Market Cap: $5.14 billion
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE:ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Do We Think Twice About ESTC?
- Products, pricing, or go-to-market strategy may need some adjustments as its 12.5% average billings growth over the last year was weak
- Estimated sales growth of 13.6% for the next 12 months implies demand will slow from its two-year trend
- Operating margin improvement of 4.5 percentage points over the last year demonstrates its ability to scale efficiently
Elastic’s stock price of $50.67 implies a valuation ratio of 2.9x forward price-to-sales. Check out our free in-depth research report to learn more about why ESTC doesn’t pass our bar.
DigitalOcean (DOCN)
Market Cap: $7.81 billion
Built for simplicity in a world of complex cloud solutions, DigitalOcean (NYSE:DOCN) provides a simplified cloud computing platform that enables developers and small businesses to quickly deploy and scale applications.
Why Is DOCN Not Exciting?
- Customers have churned over the last year due to the commoditized nature of its software, as reflected in its 99.8% net revenue retention rate
- Gross margin of 59.9% reflects its high servicing costs
- Operating margin expanded by 5.8 percentage points over the last year as it scaled and became more efficient
DigitalOcean is trading at $78.64 per share, or 8.8x forward price-to-sales. If you’re considering DOCN for your portfolio, see our FREE research report to learn more.
One Software Stock to Watch:
MongoDB (MDB)
Market Cap: $20.39 billion
Named after "humongous database," reflecting its ability to handle massive data loads, MongoDB (NASDAQ:MDB) provides a flexible document-based database platform that helps developers build, deploy, and maintain modern applications more efficiently.
Why Are We Positive On MDB?
- ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
- Projected revenue growth of 17.6% for the next 12 months suggests its momentum from the last two years will persist
At $256.82 per share, MongoDB trades at 7.7x forward price-to-sales. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662%. AppLovin before it ran 753%. Nvidia before it ran 1,178%. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.