Software is eating the world, and virtually no business is left untouched by it. The undeniable tailwinds fueling the industry have also led to strong returns for SaaS stocks lately as they’ve gained 51.5% over the past six months, outpacing the S&P 500’s 12.7% rise.

Although these businesses have produced results, only the best will survive over the long term as AI is eating into the profits of those with lower switching costs. Taking that into account, here are two software stocks boasting durable advantages and one we’re steering clear of.

One Software Stock to Sell:

Amplitude (AMPL)

Market Cap: $1.62 billion

Born from the realization that companies were flying blind when it came to understanding user behavior in their digital products, Amplitude (NASDAQ: AMPL) provides a digital analytics platform that helps businesses understand how people use their digital products to improve user experiences and drive revenue growth.

Why Are We Wary of AMPL?

1. Customers generally do not adopt complementary products as its 104% net revenue retention rate lags behind the industry standard
2. Suboptimal cost structure is highlighted by its history of operating margin losses
3. Poor free cash flow margin of 6.7% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

At $13.06 per share, Amplitude trades at 3.7x forward price-to-sales. To fully understand why you should be careful with AMPL, check out our full research report (it’s free).

Two Software Stocks to Watch:

Cloudflare (NET)

Market Cap: $99.31 billion

With a massive network spanning more than 310 cities in over 120 countries, Cloudflare (NYSE: NET) provides a global network that delivers security, performance and reliability services to protect websites, applications, and corporate networks.

Why Is NET a Top Pick?

1. Average billings growth of 34.7% over the last year enhances its liquidity and shows there is steady demand for its products
2. Expected revenue growth of 29.7% for the next year suggests its market share will rise
3. Software platform has product-market fit given the rapid recovery of its customer acquisition costs

Cloudflare’s stock price of $279.11 implies a valuation ratio of 31.7x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.

Flywire (FLYW)

Market Cap: $2.28 billion

Initially created to solve the challenges of international student tuition payments, Flywire (NASDAQ: FLYW) provides specialized payment processing and software solutions that help educational institutions, healthcare systems, travel companies, and businesses manage complex payments.

Why Do We Like FLYW?

1. Average billings growth of 33.9% over the last year enhances its liquidity and shows there is steady demand for its products
2. Projected revenue growth of 17.2% for the next 12 months suggests its momentum from the last two years will persist
3. Solid free cash flow generation relative to most peers gives it a cushion and grants it various reinvestment opportunities

Flywire is trading at $18.75 per share, or 2.8x forward price-to-sales. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.

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