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1 software stock with exciting potential and 2 we find risky

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Software is rapidly reducing operating expenses for businesses. Companies bringing it to life have been rewarded with explosive earnings growth, and the upward trend shows no signs of stopping as the industry has posted a 36.8% gain over the past six months, beating the S&P 500 by 32.5 percentage points.

However, only a handful of companies will ultimately thrive over the long term as the low barriers to entry for software businesses lead to fierce competition. On that note, here is one software stock poised to generate sustainable market-beating returns and two we’re passing on.

Two software stocks to sell:

Paycom (PAYC)

Market cap: $11.88 billion

Pioneering the concept of employees doing their own payroll with its "Beti" technology, Paycom (NYSE: PAYC) provides cloud-based human capital management software that helps businesses manage the entire employment lifecycle from recruitment to retirement.

Why Does PAYC Worry Us?

  1. Customers had second thoughts about committing to its platform over the last year as its average billings growth of 9.2% underwhelmed
  2. Estimated sales growth of 6.6% for the next 12 months implies demand will slow from its two-year trend
  3. Operating margin improvement of 5.5 percentage points over the last year demonstrates its ability to scale efficiently

At $250.32 per share, Paycom trades at 5x forward price-to-sales. To fully understand why you should be careful with PAYC, check out our full research report (it’s free).

Commvault (CVLT)

Market cap: $6.65 billion

Born from the need to create ironclad protection in an increasingly dangerous digital world, Commvault (NASDAQ: CVLT) provides data protection and cyber resilience software that helps organizations secure, back up, and recover their data across on-premises, hybrid, and multi-cloud environments.

Why Are We Wary of CVLT?

  1. Products, pricing, or go-to-market strategy may need some adjustments as its 10.3% average billings growth over the last year was weak
  2. Extended payback periods on sales investments suggest the company’s platform isn’t resonating enough to drive efficient sales conversions
  3. Operating margin failed to increase over the last year, indicating the company couldn’t optimize its expenses

Commvault is trading at $162 per share, or 4.9x forward price-to-sales. Check out our free in-depth research report to learn more about why CVLT doesn’t pass our bar.

One software stock to buy:

Guidewire Software (GWRE)

Market cap: $13.99 billion

With its systems powering the operations of hundreds of insurance brands across 42 countries, Guidewire Software (NYSE: GWRE) provides a technology platform that helps property and casualty insurance companies manage their core operations, digital engagement, and analytics.

Why Do We Love GWRE?

  1. Billings have averaged 23.9% growth over the last year, showing it’s securing new contracts that could potentially increase in value over time
  2. Software platform has product-market fit given the rapid recovery of its customer acquisition costs
  3. Highly efficient business model is illustrated by its impressive 10.2% operating margin, and its profits increased over the last year as it scaled

Guidewire Software’s stock price of $170.15 implies a valuation ratio of 7.8x forward price-to-sales. Is now the right time to buy? See for yourself in our full research report, it’s free.

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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.

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