3 Unloved Software Stocks That Could Rebound 1,000%
Software stocks usually trade at steep premiums compared to the broader market. SaaS names in particular often garner nosebleed valuations exceeding 10-times forward sales (or higher), even with ho-hum growth in the low double-digits. Why the frothy multiples? One word: margins. The profit generation potential with these companies tends to trounce most other industries. When software companies demonstrate an ability to convert revenue into earnings efficiently, Wall Street happily pays up for the prospect of future cash flows.
However, not all software stocks fit this pattern. There remain some neglected names yet to be discovered by the Street. Though executing well operationally, their share prices lag – held down by temporary setbacks or lack of attention. But with time, these software stocks could potentially soar.
Zuora (ZUO)
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I’m quite bullish on Zuora’s (NYSE:ZUO) prospects. This innovative software company provides subscription management tools that businesses need to launch and scale recurring revenue services. In today’s world, subscriptions rule the roost. Hardly any software is sold as a one-time purchase anymore. The subscription model offers companies more predictable revenue streams and higher lifetime value per customer. You don’t “own” software these days.
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Zuora sits at the center of this mega-trend, enabling firms to transition from product sales to subscriptions. Its platform handles tasks like billing, accounting, subscription metrics, and revenue recognition automation. The total addressable market for this company is huge.
Zuora still trades at a modest 3-times forward sales. This seems like a disconnect given its 22% earnings growth projected for fiscal 2025 and nearly 30% earnings per share growth for fiscal 2026. Accelerating top-line growth tells a similar story – 5% revenue expansion this year, then 9% next year, and 17% the year after. With $514 million in cash against only $403 million in debt, the company’s balance sheet looks solid too.
Freshworks (FRSH)
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Freshworks (NASDAQ:FRSH) has a large client base, an expanding market, and an India-based workforce which should drive eventual margin expansion. This diversified software maker already serves over 60,000 customers globally.
Many high-flying software companies are still burning cash. On the other hand, Freshworks already sports a pathway to profitability.
The stock has also pulled back to an attractive entry point around $17.80, after peaking near $24.10. I see this as a buying opportunity before the next leg higher. Consensus forecasts call for the company’s earnings per share to double from 30 cents in 2024 to almost 60 cents in 2026, alongside steady 20% annual revenue growth.
With negligible debt and over $1.2 billion in cash, the balance sheet appears rock-solid as well. This should limit dilution risk going forward. It’s reasonable to expect refreshed investor enthusiasm once profits materialize as projected.
eGain (EGAN)
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Don’t let its small size fool you – eGain (NASDAQ:EGAN) packs an AI-powered punch in customer engagement software. This under-the-radar firm focuses on analytics and digital-first customer service applications.
Despite relatively muted growth estimates, eGain boasts sticky revenues and tremendous cash generation for its size. It utilizes AI tools like AssistGPT to transform customer relations for enterprise clients. The company is also aggressively buying back stock, repurchasing $2.5 million last quarter with $11.2 million remaining on its buyback authorization.
With positive free cash flow annually since 2016 and limited dilution of 2.6% per year, eGain has quietly built up an attractive financial profile. A SeekingAlpha analyst “Philaretos”‘ sees 2026 revenue reaching $112 to $132 million with $19 to $32 million of EBITDA. Even at the low end, eGain currently trades around 5.4-times EV/EBITDA – quite a modest multiple for a cash-rich, high-margin Software-as-a-Service player.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.
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