The software industry has generated huge momentum by capitalizing on the remote working culture and rapid digital transformation over the past year. The industry’s strong growth prospects have fueled fierce competition among existing and new players. However, despite possessing weak fundamentals, many software stocks are currently trading at high valuations.
Given that there’s much uncertainty related to the market’s momentum in the coming weeks as investors eye the Fed’s forthcoming annual summit this week, focused on whether or not the central bank will detail its plan on tapering monetary stimulus, overvalued software stocks could retreat.
That said, investors must be cautious in picking software stocks. MongoDB Inc. (MDB), Monday.com Ltd (MNDY), and Asana Inc. (ASAN) look significantly overvalued at their current price levels. So, we think that these stocks are best avoided now.
MongoDB Inc. (MDB)
MDB in New York City is a global provider of a general-purpose database platform. The company provides a wide range of products and services, including MongoDB Enterprise Advanced, a commercial cloud database server for enterprise customers; MongoDB Atlas, a hosted multi-cloud database-as-a-service solution; and MongoDB Community Server, a free-to-download version of the database that contains the functionality that developers need to get started with MongoDB.
MDB’s operating expenses increased 40% year-over-year to $188.57 million in the first quarter, ended April 30, 2021. Its operating loss grew 43.2% from its year-ago value to $61.45 million, while its net loss increased 18.6% year-over-year to $63.99 million over this period. The company’s loss per share surged 10.6% year-over-year to $1.04.
MDB’s EPS is expected to decline 30.3% year-over-year to $1.29 in the current year. The stock has declined 3.5% in price over the past six months.
In terms of forward Price/Sales, MDB is currently trading at 30.89x, which is 658.5% higher than the 4.07x industry average. Also, in terms of its forward EV/sales, the stock is currently trading at 30.69x, which is 669.3% higher than the 3.99x industry average.
MDB’s POWR ratings are consistent with this bleak outlook. The stock 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.
MDB has a D grade for Growth and Value. Within the D-rated Software – Application industry, it is ranked #126 of 144 stocks. To see additional POWR Ratings for Stability, Sentiment, Quality, and Momentum for MDB, click here.
Monday.com Ltd (MNDY)
MNDY develops software applications in the United States, Europe, the Middle East, Africa, and internationally. The Tel Aviv-Yafo, Israel-based concern offers Work OS, a cloud-based visual work operating system made up of modular building blocks, which may be used to construct software applications and work management solutions. In addition, the company provides marketing, CRM, project management, software development, business development, consulting, and customer success services.
For the second quarter, ended June 30, 2021, MNDY’s operating expenses increased 48.9% year-over-year to $88.98 million. The company reported a $27.47 million operating loss . Its net loss was $32.48 million, while its loss per share amounted to $1.67 over this period. Analysts expect MNDY’s EPS to remain negative in the current year.
Currently, MNDY looks extremely overvalued. In terms of forward Price/Book, MNDY’s 21.47x is 265.3% higher than the 5.88x industry average. In addition, its 57.94x forward EV/Sales is significantly higher than the 3.99x industry average.
MNDY’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 a D grade for Value and Growth. In addition, MNDY is ranked #100 of 144 stocks in the Software – Application industry. Click here to see the additional POWR Ratings for MNDY (Stability, Quality, Momentum, and Sentiment).
Asana Inc. (ASAN)
Along with its subsidiaries, ASAN operates a work management platform for individuals, team leaders, and executives. The company offers a work management platform as a software service that helps individuals and teams complete tasks more quickly while enhancing employee engagement by allowing everyone to see how their work contributes to the organization’s goals. ASAN is headquartered in San Francisco.
During the first quarter, ended April 30, 2021, ASAN’s operating expenses increased 68.2% year-over-year to $118.74 million. Its operating loss surged 71.9% from its year-ago value to $49.98 million, while its net loss increased 69.2% year-over-year to $60.66 million over this period. The company reported a $0.37 loss per share over this period.
The company’s EPS is expected to remain negative in the current year.
In terms of forward EV/sales, ASAN is currently trading at 41.81x, which is 948% higher than the 3.99x industry average. Also, in terms of its forward Price/sales, the stock is currently trading at 40.46x, which is 893.5% higher than the 4.07x industry average.
ASAN’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 an F grade for Value, and a D for Growth and Stability. In the D-rated Software – Business industry, it is ranked #55 of 61 stocks.
In addition to the POWR Ratings grades I have just highlighted, one can see the ASAN rating for Momentum, Quality, and Momentum here.
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MDB shares were trading at $389.11 per share on Wednesday morning, up $4.94 (+1.29%). Year-to-date, MDB has gained 8.38%, versus a 20.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
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. More...
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