After years of multi-bagger returns from companies listed on the Nasdaq, cautious investors need to look for those that pulled back. That said, software stocks that are down on disappointing quarterly results have the biggest margin of safety. They only need to report better results next quarter to win back investors.
Overall, stocks that trade at favorable valuations have fewer downside risks if the markets drop. Investors who panic about increasing inflation rates will expect interest rates to rise sooner than expected. When rates rise, debt markets are more attractive than stocks. Companies trading at high price-to-earnings multiples are at risk of falling.
With that in mind, these seven sagging software stocks are ready to rebound. These picks are down for a variety of reasons, including a quarterly earnings miss, unexpected profit-taking and relatively weak growth. However, they are ready to bounce back.
So, the software stocks to consider are:
- C3.ai (NYSE:AI)
- AppFolio (NASDAQ:APPF)
- Fastly (NYSE:FSLY)
- Model N (NYSE:MODN)
- Qualys (NASDAQ:QLYS)
- Teradata (NYSE:TDC)
- VMware (NYSE:VMW)
In the scorecard shown above, three of the picks score well on value, growth, and quality. C3.ai and Fastly score the lowest. This suggests that while those firms are ready to rebound, they may a few weeks longer than the others to outperform the stock market. Now, let’s dive in and take a closer look at each one.
Sagging Software Stocks: C3.ai (AI)
When C3.ai reported results on Sept. 1, it failed to reverse the sag. That may reverse after it hosted two conferences. That said, the firm needs to promote its AI Suite, a platform for developing large-scale AI applications. Corporate customers in need of customer relationship management applications may consider C3’s no-code Ex Machina solution.
Moreover, in the first quarter, C3.ai posted revenue growing by 29% year-over-year (YOY) to $52.4 million. Chief Executive Officer Thomas Siebel highlighted its strategic alliance with Google Cloud. This will “allow the entire Google Cloud global sales and service organization to co-sell and service the entire family of C3 AI applications.” Overall, C3.ai needs to accelerate the adoption of its solution by connecting to Google Cloud technologies. Customers already using the service may tightly integrate their Google platform to C3.ai’s Suite.
In the second quarter, C3 forecasted revenue in the range of $56 million to $58 million. However, it will also lose up to $37 million (non-GAAP). For the full-year fiscal 2022, the company expects revenue of between $243 million to $247 million. Non-GAAP loss from operations is between $107 million to $119 million.
AppFolio is trading close to yearly lows. The company, which offers a software-as-a-service (SaaS) application for vertical markets, posted revenue growing by only 9.9% to $89.04 million. It also earned 6 cents per share in Q2.
Furthermore, AppFolio expects revenue in the range of $350 million to $355 million for the year. That would annualize its price-sales (P/S) ratio to around 3 times. APPF stock tried but failed, to break above its 52-week high in February. After many attempts to rally, investors will eventually appreciate its long-term sustainable growth. AppFolio offers customers excellent experiences, as shown by its growing customer base.
The company closed Q2 with over 16,500 real estate property management customers. This is up 10% from last year, as AppFolio improved product value for customers through its foundational software and services. Customers get digital transformation solutions, building a competitive advantage in the real estate industry. Its property management platform offers deeper business insights through an advanced customer experience. Users may manage their properties remotely. This is possible because of technology integrations from leading hardware vendors, including Smart Rent.
Sagging Software Stocks: Fastly (FSLY)
Fastly shares broke down from the $65-$70 level in May and have yet to recover. And in August, the company posted soft guidance — delaying the FSLY stock recovery.
Fastly posted revenue growing by 13.9% to $85.03 million. It also lost 15 cents per share (non-GAAP) or a loss of 51 cents on a GAAP basis. For Q3, the company expects revenue in the range of $82 million to $85 million. For fiscal year 2021, Fastly is looking for revenue between $340 million – $350 million. Meanwhile, analysts expect revenue of $83.71 million for Q3 and $345.21 million for FY2021.
Moreover, Fastly fell short because of outages in June. CEO Joshua Bixby said, “We have a couple of customers, one of them being a top 10 customer, that have yet to return their traffic to the platform. We also had several customers delay the launch of certain projects, which delayed the timing of traffic coming onto our platform.”
That said, investors may bet on Fastly winning back customer businesses. The demand from the top-10 customers will only increase as online activities grow. Markets are underestimating Fastly’s strong relationships with its customers. As the company strengthens its network and increases its reliability, customers will reallocate more spending to Fastly’s services.
Model N (MODN)
Model N, where N stands for “the next big thing,” allows customers to configure and quote complex products. The company posted strong Q3 results, surpassing $50 million in total quarterly revenue.
Overall, Model N reported revenue growing by 24% YOY to $51 million. CEO Jason Blessing attributed the milestone revenue to the last three years of good strategic decisions. For example, the company focused on its go-to-market programs. This included SaaS transitions. During the quarter, Model N signed two new logos. Creston is an example of a company that is a $2 billion workplace technology manufacturer. Furthermore, the team renewed its long-term relationship with California Eastern Labs. This customer will transition to SaaS through Model N’s cloud offering.
Moreover, the company’s professional services growth will lead to software cloud conversions. The service team delivered its projects on time and within budget. Customers are getting a strong return on investment. In turn, this will support higher project volumes as remote work continues into next year.
Collectively, on Wall Street, four analysts rate MODN stock as a buy with a $48.25 price target.
Sagging Software Stocks: Qualys (QLYS)
Qualys broke out a few times in the last two years, only to spend most of the time at the $100 level. The firm is a provider of cloud-based IT, security and compliance solutions.
In Q2, Qualys posted revenue growing by 12% to $99.7 million. It also earned 79 cents per share (non-GAAP). In Q3, it expects revenue between $103.8 million to $104.4 million and earnings per share (EPS) of up to between 78 cents and 80 cents. For the year, Qualys expects EPS in the range of $3.02 to $3.07.
Investors may watch for growing average selling prices in the quarters ahead. Combined with lower operating expenses and ongoing investments in research and development, investors should expect continued long-term profitable growth.
With all of this in mind, higher sales productivity could lead to revenue beating guidance. Process improvements include bringing more solution architects. Investments will also help Qualys meet its guidance. Its partnership with Deep Watch adds managed service provider services to the offering.
Teradata’s rally ended when the company posted guidance that did not meet estimates. Thus, investors may buy the dip and wait for TDC stock to recover next.
On Sept. 9, Teradata forecasted long-term revenue of over $1 billion in cloud annual recurring revenue. By fiscal 2025, free cash flow will top $550 million. For FY2022, Teradata said its Cloud ARR YOY will grow by at least 70%. Additionally, non-GAAP EPS will be $1.60 to $1.70. Meanwhile, analysts expect EPS of $2.04 for FY2022. The light guidance hurt the stock, giving investors another chance to build a position.
CEO Steve McMillan said that Teradata differentiates itself from the competition by providing “a true hybrid, multi-cloud solution, delivering the best price performance at scale in the industry.”
Investors should expect Teradata to capture the growing addressable market of the cloud. It has valuable patent technologies and may offer hybrid, multi-cloud capabilities.
Sagging Software Stocks: VMware (VMW)
VMWare fell when it reported earnings that showed a slowdown in subscription and SaaS sales. In Q2, total revenue grew by 9% to $3.14 billion. That said, subscription and SaaS revenue of $1.51 billion is 12% from last year.
Investors looking beyond the forecast may buy the stock ahead of the spinoff and share structure. The spinoff from Dell (NYSE:DELL) will help VMware pursue other partnerships. CEO Raghu Raghuram said it is primarily committed to customer choice, who need more choice and flexibility. So long as the company offers good service through a perpetual business model, customer spending on VMware products will continue.
That said, VMware’s spinoff is a potential risk factor that would undermine the stock rebound story. It will generate up to $9.7 billion in debt, hurting shareholders. In addition, public cloud vendors are competing with VMware’s products. Overall, Raghuram expects VMware will complete the spinoff from Dell by November. So, as it builds a stronger corporate culture without Dell, VMware may build strategic relationships that strengthen its ecosystem.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.