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2 SaaS Stocks to Avoid Despite Their Popularity on Wall Street

Although the Software-as-a-Service (SaaS) industry exhibits solid long-term prospects, the Fed’s recent rate hike has increased the chances of a recession in the near term, and pessimistic sentiments have hit tech stocks severely. Hence, popular but fundamentally weak SaaS stocks Palantir Technologies (PLTR) and Twilio (TWLO) might be best avoided. Read more…

Software-as-a-Service (SaaS) is an important segment in cyberspace. Numerous companies increasingly rely on cloud-based and subscription software services to support their activities, creating significant opportunities for SaaS providers.

On the other hand, the stock market is having a hard time digesting the recent central bank rate hikes. The Fed has raised interest rates substantially to make borrowing more expensive, which has hit market sentiments.

What started off as the third-quarter rebound for tech stocks has turned into another sell-off. The tech-heavy Nasdaq Composite dropped 5.1% last week and 5.5% the prior week, marking the worst two-week stretch for the index since it plummeted more than 20% in March 2020.

According to CNBC’s September Fed survey of economists, fund managers, and strategists, there is a 52% chance that the United States will enter into a recession over the next 12 months.

Although the SaaS market shows favorable long-term prospects, as tech stocks are getting hammered, it might be wise to avoid fundamentally weak SaaS stocks Palantir Technologies Inc. (PLTR) and Twilio Inc. (TWLO) despite their popularity on Wall Street.

Palantir Technologies Inc. (PLTR)  

PLTR builds and deploys software platforms for the intelligence community for assistance in counterterrorism investigations and operations. The company provides Palantir Gotham that helps identify patterns hidden deep within datasets. The company has a trading volume of 34.20 million and an average volume of 36.90 million.

On September 20, PLTR announced its partnership with Hyundai Heavy Industries Group to help the digital transformation of South Korea’s storied shipbuilders. Although the expansion is valued at $20 million, it is stretched over five long years. 

PLTR’s adjusted net income attributable to common stockholders fell 121.6% from its prior-year quarter to a negative $21.12 million in the fiscal second quarter that ended June 30. Its adjusted EPS decreased 125% from the prior-year period to a negative $0.01. Its loss from operations amounted to $41.75 million.

The consensus EPS estimate of $0.02 for the fiscal third quarter ending September 2022 indicates a 57.4% decline year-over-year. The revenue is estimated to be $474.96 million for the same quarter. Additionally, PLTR has missed the consensus EPS estimates in three of the trailing four quarters.  

Over the past year, the stock has declined 74.1% to close its last trading session at $7.69. It has fallen 59.4% year-to-date. 

PLTR’s weak fundamentals are reflected in its POWR Ratings. It has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.  

The stock has an F grade for Sentiment and a D grade for Value and Stability. It is ranked #21 of 26 stocks in the F-rated Software – SAAS industry.  

In addition to the POWR Rating grades we’ve stated above, one can see PLTR ratings for Growth, Momentum, and Quality here

Twilio Inc. (TWLO)  

TWLO offers a cloud communication platform that enables developers to build, scale and operate real-time communications within software applications. It also provides a customer engagement platform. It has a market volume of 4.12 million and an average volume of 4.21 million. 

TWLO’s total operating expenses increased 41.9% year-over-year to $757.22 million for the second quarter ended June 30, 2022. The company’s non-GAAP income from operations declined 273.8% year-over-year to a negative $7.30 million. Its non-GAAP net loss rose 4.9% year-over-year to a negative $19.25 million.

Analysts expect TWLO’s EPS to decline 136.3% from the prior year to a negative $0.59 for the fiscal year 2022. Its revenue is likely to be $3.87 billion for the same year. Additionally, the company has missed the EPS estimates in each of the trailing four quarters. 

The stock has declined 80.2% over the past year to close the last trading session at $68.13. It has slumped 74.1% year-to-date.  

It’s no surprise that TWLO has an overall D rating, which translates to Sell in our POWR Ratings system.  

It has a D grade for Momentum, Stability, and Quality. It is ranked #23 in the same industry. Click here to see the other ratings of TWLO for Growth, Value, and Sentiment.

PLTR shares were unchanged in after-hours trading Monday. Year-to-date, PLTR has declined -58.65%, versus a -22.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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