The software industry has reaped handsome benefits from the COVID-19 pandemic as the demand for software solutions has hit all-time highs amid the adoption of remote lifestyles globally. In addition, the rapid digital transformation of virtually all industries has added fuel to the industry's growth.

However, the software industry has become highly saturated, with many new companies entering the space to capitalize on its long-term growth prospects. With established companies dominating the market, smaller and fundamentally weak software companies are struggling to stay afloat.

Two cases in point are Coupa Software Incorporated (COUP) and Sumo Logic Inc. (SUMO). Analysts recently downgraded those two names. So, we think these stocks are best avoided now.

Click here to check out our Software Industry Report for 2021

Coupa Software Incorporated (COUP)

COUP in San Mateo, Calif., offers a cloud-based company expenditure management technology. Its platform links organizations with suppliers worldwide and gives insight and control over how businesses spend money. In addition, the company has formed a strategic alliance with Japan Cloud Computing L.P to establish a joint venture, Coupa K.K. Truist Securities has lowered the stock’s price target to $225 from $326.

COUP's total operating expenses increased 41.8% year-over-year to $164.82 million in the third quarter, ended October 31, 2021. Its operating loss grew 66.7% from its  year-ago value to $56.09 million. The company's net loss surged 50% from the prior-year quarter to $91.20 million, while its loss per share increased 39.8% year-over-year to $1.23 over this period.

The company's EPS is expected to decline 14.3% next quarter and 35.1% in the current year. The stock has declined 50.6% in price over the past month and 29.9% over the past month.

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

COUP is rated a D grade for Quality, Stability, and Value. Within the D-rated Software – Business industry, it is ranked #54 of 60 stocks.

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

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

Sumo Logic Inc. (SUMO)

SUMO offers a cloud-native software-as-a-service platform that helps enterprises worldwide meet the problems and possibilities posed by digital transformation, contemporary apps, and cloud computing. The Redwood City, Calif.-based company provides a portfolio of operational intelligence, security intelligence, business intelligence, and global intelligence solutions. The stock was recently downgraded to 'Hold' from ‘Buy’ by Berenberg.

For the third quarter, ended October 31, 2021, SUMO’s operating expenses increased 19.4% year-over-year to $73.04 million. Its operating loss grew 37.2% from its  year-ago value to $31.41 million. The company’s net loss grew 28.9% from the prior-year quarter to $30.84 million, while its loss per share came in at $0.28.

The $0.13 consensus EPS estimate for the next quarter represents an 18.2% decline year-over-year. The stock has declined 50.2% over the past year and 17.9% over the past month.

SUMO’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 has a D grade for Quality and a C for Growth and Momentum. In the F-rated Software – Application industry, it is ranked #135 of the 168 stocks.

In addition to the POWR Ratings grades I have just highlighted, you can see the SUMO ratings for Stability, Value, and Sentiment here.

Click here to check out our Software Industry Report for 2021

COUP shares rose $2.88 (+1.85%) in premarket trading Monday. Year-to-date, COUP has declined -52.80%, versus a 27.36% 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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