Software is rapidly reducing operating expenses for businesses. This secular theme makes SaaS companies attractive investment candidates but also comes with higher valuations that cause volatility. Unfortunately, the rich prices have haunted them over the past six months as the industry has shed 1.7%. This drawdown is a noticeable divergence from the S&P 500’s 16.3% return.
Investors should tread carefully as only some businesses are worthy of their valuations because AI and competition will commoditize many products. On that note, here are three software stocks we’re passing on.
Paychex (PAYX)
Market Cap: $40.24 billion
Once known as the go-to service for small business payroll needs, Paychex (NASDAQ:PAYX) provides payroll processing, HR services, employee benefits administration, and insurance solutions to small and medium-sized businesses.
Why Does PAYX Worry Us?
- Sales trends were unexciting over the last two years as its 6.7% annual growth was well below the typical software company
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 3.1 percentage points
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 5 percentage points
At $111.78 per share, Paychex trades at 6.1x forward price-to-sales. To fully understand why you should be careful with PAYX, check out our full research report (it’s free for active Edge members).
BigCommerce (BIGC)
Market Cap: $414.4 million
As a founding member of the MACH Alliance advocating for modern tech standards, BigCommerce (NASDAQ:BIGC) provides a SaaS platform that enables businesses to build and manage online stores, connect with marketplaces, and integrate with point-of-sale systems.
Why Are We Out on BIGC?
- Customers had second thoughts about committing to its platform over the last year as its average billings growth of 3.9% underwhelmed
- Estimated sales growth of 3.9% for the next 12 months implies demand will slow from its two-year trend
- Historical operating margin losses point to an inefficient cost structure
BigCommerce’s stock price of $4.99 implies a valuation ratio of If you’re considering BIGC for your portfolio, see our FREE research report to learn more.
RingCentral (RNG)
Market Cap: $2.35 billion
Built on its proprietary Message Video Phone (MVP) platform that unifies multiple communication methods, RingCentral (NYSE:RNG) provides AI-driven cloud communications and collaboration solutions that enable businesses to connect through voice, video, messaging, and contact center services.
Why Do We Avoid RNG?
- Average billings growth of 4.2% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
- Estimated sales growth of 4.5% for the next 12 months implies demand will slow from its two-year trend
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
RingCentral is trading at $27.08 per share, or 1x forward price-to-sales. Read our free research report to see why you should think twice about including RNG in your portfolio.
Stocks We Like More
The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today
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