The continuation of remote working, even as the COVID-19 pandemic abates, and the ongoing digital transformation have been driving the software industry’s relentless growth. Investors’ increasing interest in software stocks is evident in the SPDR S&P Software & Services ETF’s (XSW) 7% returns over the past month compared to the SPDR S&P 500 Trust ETF’s (SPY) 2.4% gains.

The growing demand for advanced software products and services from almost every industry should help the software industry keep growing in the coming months. According to Grand View Research, the global business software and services market is expected to grow at an 11.3% CAGR between 2021 – 2028. However, the software industry is overcrowded with small players vying for market share. So, every company in this space may not be able to capitalize on the industry tailwinds.

SecureWorks Corp. (SCWX) and Materialise NV (MTLS) are currently trading at valuations that are not justified  by their financials and growth prospects. In fact, Wall Street analysts expect these two stocks to suffer price declines in the near term. So, these stocks are best avoided now.

SecureWorks Corp. (SCWX)

SCWX in Atlanta, Ga., provides technology-driven information security solutions for the protection of customers, such as software-as-a-service solutions, managed security services, and professional services. The company serves customers in a range of industries, including financial services, manufacturing, technology, retail, insurance, utility, and healthcare sectors.

SCWX’s net revenue decreased 1.2% year-over-year to $139.46 million for its fiscal first quarter ended April 30, 2021. Its loss from operations came in at $ 7.86 million compared to $10.77 million in the prior-year period. Its net loss for the quarter was  $6.39 million compared to $7.54 million in the previous year. Also, its loss per share was  $0.08 compared to $0.09 in the year-ago period.

In terms of forward EV/EBITDA, SCWX’s 44.23kx is significantly higher than the 16.98x industry average. In terms of forward P/CF, the stock’s 347.83x is much higher than the 22.65x industry average.

Analysts expect SCWX’s EPS to remain negative in its fiscal years 2022 and 2023. The company’s revenue is expected to decrease 2.8% year-over-year to $545.20 million in 2022. The stock has gained 32.5% over the past month to close yesterday’s trading session at $20.96. However, Wall Street Analysts expect the stock to hit $15 in the near-term, which indicates a potential 28.4% decline.

SCWX’s poor prospects are apparent in its POWR Ratings also. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. It has a D grade for Growth.

Click here to see more of SCWX’s component grades. It is ranked #8 of 24 stocks in the D-rated Software – Security industry.

Click here to check out our Software Industry Report for 2021

Materialise NV (MTLS)

Headquartered in Leuven, Belgium, MTLS provides additive manufacturing and medical software, and 3D printing services. It operates through three segments: Materialise Software, Materialise Medical, and Materialise Manufacturing. The company has collaboration agreements with Zimmer Biomet Holdings, Inc. (ZBH), Medtronic Inc. (MDT) and Abbott Laboratories Inc. (ABT).

MTLS’ revenue decreased 1.5% year-over-year to $53.41 million for its fiscal first quarter ended March 31, 2021. Its loss before taxes was  $4.48 million, which represents a 56.4% year-over-year increase. Its net loss increased 26.5% year-over-year to $4.30 million. The company’s loss per share increased 40% year-over-year to $0.08.

In terms of forward non-GAAP P/E, MTLS’ 2,062.87x is 7,613.1% higher than the 26.74x industry average. In terms of forward non-GAAP PEG, the stock’s 19.63x is 953.8% higher than the 1.86x industry average.

The company’s revenue is expected to increase 12.4% year-over-year to $267.21 million in its fiscal year 2022. However, analysts expect MTLS’ EPS to decrease 100% year-over-year to negative $0.02 for the quarter ending September 30, 2021. The stock has lost 13.3% over the past month to close yesterday’s trading session at $24.43. Wall Street Analysts expect the stock to hit $15 in the near-term, which indicates a potential 38.6% decline. MTLS’ weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which translates to Sell in our proprietary rating system. It also has a D grade for Sentiment.

Click here to see MTLS’ rating for Growth, Value, Stability, Quality, and Momentum as well. MTLS is ranked #5 of 8 stocks in the F-rated Technology – 3D Printing industry.

SCWX shares were trading at $21.66 per share on Wednesday afternoon, up $0.70 (+3.34%). Year-to-date, SCWX has gained 52.32%, versus a 16.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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