StockStory identifies GitLab as a resilient software stock to consider, while flagging Elastic and Wix as names that underwhelm investors. The analysis comes as software-as-a-service equities have gained 56.3% over the past six months, significantly outpacing the S&P 500's 12% rise during the same period.
The firm argues that while the sector benefits from broad tailwinds, artificial intelligence is eroding profits for companies with lower switching costs. Only the strongest performers are expected to survive the long term, a distinction that drives the selection of one preferred stock and two to avoid.
GitLab (NASDAQ:GTLB) is the primary recommendation, with a market capitalization of $8.66 billion. The company provides a single-application DevSecOps platform that enables development, operations, and security teams to collaborate on building and deploying software. StockStory points to GitLab's annual revenue growth of 25.9% over the last two years as evidence of rising market share. The stock trades at $50.42 per share, representing a forward price-to-sales multiple of 7.8x. The company maintains an all-remote workforce, a model the source describes as pioneering in software development.
Financial metrics cited for GitLab include a 23.3% growth in annual recurring revenue over the last year, which StockStory interprets as evidence of its ability to secure long-term customer commitments. Additionally, the company reports a gross margin of 85.9%, which the firm characterizes as best-in-class for prominent and differentiated software.
Elastic (NYSE:ESTC), valued at $9.90 billion, is listed as a stock to avoid. Built on open-source Elasticsearch technology, Elastic offers a search and AI platform for data insights, application monitoring, and security protection. The stock is priced at $94.49 per share, or 4.8x forward price-to-sales. StockStory notes that Elastic's average billings growth of 14% over the last year was subpar, suggesting potential struggles with demand that could necessitate price reductions. Furthermore, operating margins failed to increase over the same period, indicating an inability to optimize expenses, even though customer acquisition costs are recovered quickly enough to fund growth initiatives.
Wix (NASDAQ:WIX), with a market cap of $3.00 billion, is the second stock flagged for caution. The company provides a cloud-based website builder for over 263 million registered users worldwide. Its stock price of $71.73 implies a forward price-to-sales valuation of 1.3x. StockStory highlights that Wix's average billings growth of 13.9% over the last year did not impress, indicating that its offerings struggled to generate meaningful interest.
Operational efficiency has also declined for Wix, with costs rising faster than revenue over the last year. This dynamic caused the company's operating margin to drop by 17.5 percentage points. Looking ahead, StockStory anticipates that capital intensity will increase as Wix's free cash flow margin is expected to fall by 4.1 percentage points over the next year.