Yahoo Finance

Software is eating the world, and virtually no business is left untouched by it. Companies bringing it to life have been rewarded with explosive earnings growth and high valuation multiples, but the latter has weighed on returns as the industry was flat over the past six months. A consolation is that the S&P 500 hasn’t budged either.

Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. Keeping that in mind, here are three software stocks we’re swiping left on.

Domo (DOMO)

Market Cap: $351.4 million

Founded by Josh James after selling his former business Omniture to Adobe, Domo (NASDAQ:DOMO) provides business intelligence software that allows managers to access and visualize critical business metrics in real-time, using their smartphones.

Why Do We Think DOMO Will Underperform?

1. Offerings couldn’t generate interest over the last year as its billings have averaged 3.5% declines

2. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment

3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Domo is trading at $9.00 per share, or 1.1x forward price-to-sales. Check out our free in-depth research report to learn more about why DOMO doesn’t pass our bar.

Five9 (FIVN)

Market Cap: $2.11 billion

Started in 2001, Five9 (NASDAQ: FIVN) offers software-as-a-service that makes it easier for companies to set up and efficiently run call centers to offer more tailored customer support.

Why Are We Wary of FIVN?

1. 18% annual revenue growth over the last three years was slower than its software peers

2. Estimated sales growth of 8.4% for the next 12 months implies demand will slow from its three-year trend

3. Sky-high servicing costs result in an inferior gross margin of 54.7% that must be offset through increased usage

Five9’s stock price of $28.23 implies a valuation ratio of 2.1x forward price-to-sales. Dive into our free research report to see why there are better opportunities than FIVN.

Olo (OLO)

Market Cap: $1.54 billion

Founded by Noah Glass, who wanted to get a cup of coffee faster on his way to work, Olo (NYSE:OLO) provides restaurants and food retailers with software to manage food orders and delivery.

Why Does OLO Fall Short?

1. Gross margin of 54.7% is way below its competitors, leaving less money to invest in areas like marketing and R&D

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

3. Low free cash flow margin of 7.4% for the last year gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders