Due to rapid digitization and remote lifestyles, the software industry's strong growth prospects have sparked fierce competition among existing and new industry entrants. Further, investors' optimism about the industry's continued growth has propelled many software stocks to high valuations that are not justified by their current or expected financials.

Following a seven-month winning streak, equity markets are down so far in September. Stock indexes ended flat on Wednesday, giving up Tuesday gains on better-than-expected inflation data. While multiple fiscal stimulus packages and the Fed’s dovish monetary policy stance have been driving the economic recovery, concerns over the resurgence of COVID-19 cases and rising Treasury yields could cause  investors to drop overvalued tech stocks.

We think weak fundamentals and poor earnings growth potential could cause overvalued software stocks Coupa Software Incorporated (COUP), Confluent Inc. (CFLT), and Ceridian HCM Holding Inc. (CDAY) to suffer a downturn in the near term. So,  they are best avoided now.

Click here to check out our Software Industry Report for 2021

Coupa Software Incorporated (COUP)

COUP offers a cloud-based business spend management platform. Its platform connects businesses with suppliers worldwide, giving them insight and control over spending money, improving supply chains, and managing liquidity. It serves companies in various industries, including healthcare and pharmaceuticals, retail, financial services, manufacturing, and technology. COUP is based in San Mateo, Calif.

COUP’s operating loss increased 70.1% year-over-year to $54.30 million in the second quarter, ended July 31, 2021. The company’s net loss grew 101.2% from its  year-ago value to $54.30 million, while its loss per share surged 93.8% from the prior-year quarter to $1.24.

A $0.27  consensus EPS estimate for the current year represents a 64.9% decline year-over-year. The stock has declined 28.6% in price year-to-date and 14.2% over the past six months.

In terms of forward Price/Sales, COUP is currently trading at 25.49x, which is 520.4% higher than the 4.11x industry average. Also, in terms of its forward EV/Sales, the stock is currently trading at 27.02x, which is 551.2% higher than the 4.15x industry average.

COUP’s POWR ratings are consistent with this bleak outlook. The company has an overall D rating, which translates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

COUP is rated a D grade for Quality, Stability, and Value. Additionally, within the D-rated Software – Business industry, it is ranked #52 of 60 stocks.

To see additional POWR Ratings for Growth, Sentiment, and Momentum for COUP, click here.

Confluent Inc. (CFLT)

CFLT is a cloud-native platform for data-in-motion that enables organizations in the United States and abroad to connect their applications around real-time streams. The Mountain View, Calif.-based company offers Apache Kafka, a community distributed event streaming platform. In addition, it  provides professional services and tools for Confluent customers to help in streaming platform adoption, and training and certification programs for Confluent education.

For the second quarter, ended June 30, 2021, CFLT’s non-GAAP operating loss increased 16.4% year-over-year to $36.8 million. Its non-GAAP loss per share grew 63.2% from its  year-ago value to $0.31. The company’s net cash used in operating activities surged 100.9% from the prior-year quarter to $43.2 million. Its  EPS is expected to decline at 6.8% per annum for the next five years.

Currently, CFLT looks highly overvalued. In terms of forward Price/Book, CFLT’s 16.22x is 157.3% higher than the 6.30x industry average. In addition, its 45.49x forward EV/Sales  is 996.4% higher than the 4.15x industry average.

CFLT’s weak fundamentals are reflected in its POWR ratings. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. The stock also has a D grade for Value, Growth, and Stability. In the D-rated Software – Application industry, it is ranked #123 of the 147 stocks.

In addition to the POWR Ratings grades we have just highlighted, one  can see the CFLT rating for Momentum, Quality, and Sentiment here.

Ceridian HCM Holding Inc. (CDAY)

CDAY is a  human capital management software company in the United States, Canada, and globally. The company offers Dayforce, a cloud HCM platform with HR, payroll, benefits, workforce management, and talent management capabilities, and Powerpay, a cloud HR and payroll solution for small businesses. CDY is based in Minneapolis, Minn.

During the second quarter ended June 30, 2021, CDAY’s operating loss was  $19.7 million, versus a $4 million operating profit in the prior-year period. The company reported a $25.8 million net loss, versus net income of $5.5 million in the second quarter of 2020. Its loss per share amounted to $0.17, compared to an EPS of $0.04 in the same quarter last year. Analysts expect its EPS to decline 50% year-over-year to $0.25 in fiscal 2021.

In terms of forward Price/Book, CDAY’s 7.64x is 21.1% higher than the 6.3x industry average. In addition, its 15.81 forward Price/Sales  is 284.8% higher than the 4.11x industry average.

CDAY’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary rating system.

It also has an F grade for Quality, and a D for Value. CDAY is ranked #110 of 147 stocks in the Software – Application industry.

Click here to see the additional POWR Ratings for CDAY (Growth, Stability, Sentiment, and Momentum).

Click here to check out our Cloud Computing Industry Report for 2021

COUP shares rose $0.87 (+0.36%) in premarket trading Thursday. Year-to-date, COUP has declined -28.64%, versus a 20.48% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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