Yahoo Finance

From commerce to culture, software is digitizing every aspect of our lives. In the past, the undeniable tailwinds fueling SaaS companies led to lofty valuation multiples that made it easier to raise capital. But this was a double-edged sword as the high prices exposed them to big drawdowns, and unfortunately, the industry has tumbled by 4.7% over the last six months. This performance was worse than the S&P 500’s 2.4% loss.

Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. On that note, here are three software stocks that may face trouble.

UiPath (PATH)

Market Cap: $7.22 billion

Started in 2005 in Romania as a tech outsourcing company, UiPath (NYSE:PATH) makes software that helps companies automate repetitive computer tasks.

Why Are We Wary of PATH?

1. Offerings struggled to generate meaningful interest as its average billings growth of 5.7% over the last year did not impress

2. Estimated sales growth of 6.4% 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

UiPath is trading at $13.10 per share, or 4.8x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PATH.

F5 (FFIV)

Market Cap: $16.1 billion

Initially started as a hardware appliances company in the late 1990s, F5 (NASDAQ:FFIV) makes software that helps large enterprises ensure their web applications are always available by distributing network traffic and protecting them from cyberattacks.

Why Do We Think Twice About FFIV?

1. Muted 3.5% annual revenue growth over the last three years shows its demand lagged behind its software peers

2. Customers were hesitant to make long-term commitments to its platform as its ARR averaged 8.3% declines over the last year

3. Estimated sales growth of 3.6% for the next 12 months is soft and implies weaker demand

F5’s stock price of $280.59 implies a valuation ratio of 5.4x forward price-to-sales. If you’re considering FFIV for your portfolio, see our FREE research report to learn more.

SoundHound AI (SOUN)

Market Cap: $4.42 billion

Founded in 2005, SoundHound AI (NASDAQ:SOUN) develops independent voice artificial intelligence solutions that enable businesses across various industries to offer customized conversational experiences to consumers.

Why Does SOUN Worry Us?

1. Gross margin of 44.1% reflects its high servicing costs

2. Efficiency fell over the last year as its operating margin declined by 39 percentage points because it pursued growth instead of profits

3. Negative free cash flow raises questions about the return timeline for its investments