While the overall market remains buoyant, there are pockets where troubled stocks are struggling to gain traction. One sector that is rife with problems is the software space. Many software companies enjoyed explosive growth during the pandemic and even before, as the rise of cloud computing created huge demand worldwide. A lot of companies overspent and over-hired during the good times. But now, many of these companies are suffering from a hangover and trying to recapture the highs their share prices enjoyed during the stock market’s 2021 bull run.
Not all software concerns look like they will make it. Some will no doubt crash and burn for good. Being able to spot which companies to avoid is important for investors hoping to achieve long-term gains in their portfolios. Here are three doomed software stocks destined for disaster.
SoFi Technologies (SOFI)
Best described as an online bank, SoFi Technologies (NASDAQ:SOFI) is a former meme stock whose share price has been repeatedly manipulated by retail investors. Through proprietary software, SoFi has developed an online platform and app where consumers can quickly and easily apply for personal loans ranging from mortgages to credit cards. However, the company’s biggest business segment is in student loans. That business has been decimated by the current and former administrations’ moratorium on student loan repayments.
SoFi has estimated that it lost at least $300 million in revenue due to the pause in student loan repayments that began in March 2020. The financial difficulty led traders to heavily short the stock, which made it ripe for a short squeeze by retail investors. However, it never took long before SOFI stock came crashing back to earth.
Today, the share price is nearly 65% below its all-time high in January 2021. News that the U.S. Supreme Court struck down President Joe Biden’s plan to forgive up to $400 billion in federal student loan debt hasn’t helped the stock much, and analysts continue to question SoFi’s business strategy.
Shopify (SHOP)
Shopify (NYSE:SHOP) is another software company whose stock looks to have rebounded this year but whose long-term outlook is less assured. Year to date, SHOP stock has increased 92%, which is great if you bought the shares in January. However, the stock is down 59% from the pandemic peak it reached in November 2021 before the market correction took hold. Today, Shopify is struggling with a major slowdown in its business, which provides software that helps retailers run their online stores and retail point-of-sale systems.
Business boomed during the pandemic as physical retail locations were forced to close, pushing merchants online and into Shopify’s arms. But as retail locations re-opened, Shopify’s business has suffered. This spring, the company cut 20% of its workforce and has since been hit with a $130 million class-action lawsuit that alleges it reneged on severance packages offered to employees who were let go. Most recently, Shopify introduced a new artificial intelligence (A.I.) assistant for merchants but gave no timeline for when it will actually be available.
Atlassian (TEAM)
Atlassian (NASDAQ:TEAM) is a company from down under in Australia that develops products used by other software developers to create software applications. The company is about as pure a software company as exists. Founded in 2002, Atlassian today boasts 242,623 customers in over 190 countries worldwide. While TEAM stock is up over 40% this year, it is trading more than 60% below the all-time high in October 2021. Over the past 12 months, the share price has declined almost 2%. Insiders at the company have reportedly been selling the stock.
As with the other software concerns on this list, the problem with Atlassian stock seems to be slowing growth and declining profits. The company most recently reported quarterly revenue growth of 34%, which was a big slowdown from 60% growth a year earlier. Demand for the company’s cloud computing software has been decelerating particularly fast. It’s also worth noting that Atlassian remains a comparatively small software company with 2022 revenues of $2.80 billion.
On the date of publication, Joel Baglole did not hold (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.
