Yahoo Finance

Software is eating the world, and virtually no business is left untouched by it. 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 has returned 4.8%. This was a good place to be as the S&P 500 fell by 1.1%.

Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. Taking that into account, here is one software stock boasting a durable advantage and two we’re swiping left on.

Two Software Stocks to Sell:

Sprout Social (SPT)

Market Cap: $1.36 billion

Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ:SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.

Why Does SPT Worry Us?

1. Operating losses show it sacrificed profitability while scaling the business

2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.1% for the last year

Sprout Social is trading at $23.75 per share, or 3x forward price-to-sales. Read our free research report to see why you should think twice about including SPT in your portfolio, it’s free.

Zuora (ZUO)

Market Cap: $1.55 billion

Founded in 2007, Zuora (NYSE:ZUO) offers software as a service platform that allows companies to bill and accept payments for recurring subscription products.

Why Do We Pass on ZUO?

1. 11.3% annual revenue growth over the last three years was slower than its software peers

2. Customers had second thoughts about committing to its platform over the last year as its billings plateaued

3. Gross margin of 69.8% is below its competitors, leaving less money to invest in areas like marketing and R&D

At $10.11 per share, Zuora trades at 3.4x trailing 12-month price-to-sales. Check out our free in-depth research report to learn more about why ZUO doesn’t pass our bar.

One Software Stock to Buy:

The Trade Desk (TTD)

Market Cap: $26.73 billion

Founded by former Microsoft engineers Jeff Green and Dave Pickles, The Trade Desk (NASDAQ:TTD) offers cloud-based software that uses data to help advertisers better plan, place, and target their online ads.

Why Will TTD Beat the Market?

1. Billings have averaged 27.4% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time

2. Fast payback periods on sales and marketing expenses allow the company to invest heavily and onboard many customers concurrently

3. Disciplined cost controls and effective management resulted in a strong trailing 12-month operating margin of 17.5%, and its operating leverage amplified its profits over the last year