We recently compiled a list of the 7 Cheap Software Stocks to Invest In. In this article, we are going to take a look at where Five9 (NASDAQ:FIVN) stands against the other cheap software stocks.
Avoiding Hype and Focusing on Downstream Opportunities
Billionaire investor David Tepper, Founder and President of Appaloosa Management, recently shared his thoughts on the market and investment strategies in a conversation on CNBC on September 26. Tepper began by discussing his views on tech stocks, specifically mentioning Meta and Google, which he owns, and Nvidia, which he had previously sold due to concerns about its high valuation.
Tepper also touched on energy, particularly the growing demand for power to support the development of new technologies such as artificial intelligence (AI). He emphasized the importance of natural gas in meeting this demand, stating that it is necessary for powering AI’s growth. Tepper expressed skepticism about the feasibility of relying solely on renewable energy sources, citing the need for a more practical and realistic approach to meeting the country’s energy needs. He also mentioned that he has spoken to governors from both sides of the aisle and believes that a collective effort is needed to address the country’s energy requirements.
When asked about the upcoming election, Tepper stated that he is a proponent of a split government, believing that it is beneficial for the economy and the markets. He expressed concern about the potential for a sweep by either party, citing the risks of populist and progressive policies that could lead to giveaways and increased government spending. Tepper emphasized that his views are purely from a market perspective and that he does not want to see either party dominate the government. He believes that a split government will prevent either party from implementing extreme policies, which would be beneficial for the markets.
Regarding AI, Tepper acknowledged that it is a rapidly growing field but expressed caution about investing directly in AI companies. Instead, he prefers to invest in downstream companies that will benefit from the growth of AI. Tepper also mentioned that he is impressed by the potential of AI to drive growth and innovation, but is uncertain about the long-term prospects of certain companies, which are heavily reliant on AI.
In terms of his investment strategy, Tepper emphasized the importance of being cautious and not getting caught up in the hype surrounding certain stocks or trends. He noted that he has been successful in the past by being contrarian and taking a more nuanced approach to investing. Tepper also mentioned that he is not afraid to take a step back and re-evaluate his investment decisions, citing the importance of being adaptable in a rapidly changing market environment.
David Tepper’s insights on the market and investment strategies offer a valuable perspective on the current state of the economy and the tech industry. His emphasis on being cautious and adaptable in a rapidly changing market environment is a timely reminder for investors to remain vigilant and avoid getting caught up in the hype surrounding certain stocks or trends. With that in context, let’s take a look at the 7 cheap software stocks to invest in.
Our Methodology
To compile our list of the 7 cheap software stocks to invest in, we used Finviz and Yahoo stock screeners to find the 30 largest software companies with a PE ratio of less than 20. From that list, we narrowed our choices to the 7 stocks that analysts see the most upside to. The list is sorted in ascending order of analysts’ average upside potential, as of October 3. We also added the hedge fund sentiment around each stock, which was taken from our database of 912 elite hedge funds, as of Q2 of 2024. The list is sorted in ascending order of their average upside potential.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An IT engineer working on a laptop as planograms for a cloud-based virtual contact center platform appear on the monitor.
Five9 (NASDAQ:FIVN)
Forward P/E Ratio as of October 3: 12.43
Upside Potential: 61.57%
Number of Hedge Fund Holders: 34
Five9 (NASDAQ:FIVN) provides cloud contact center software for businesses looking to enhance customer engagement. The platform enables seamless communication through various channels, including phone, email, and social media.
Five9 (NASDAQ:FIVN) focuses on improving customer experience through automation and AI. The company’s AI and automation offerings are expected to play a significant role in its future growth and profitability. Management noted that these offerings have higher gross margins than its traditional contact center software, and they are expected to contribute to the company’s revenue growth in the future. Five9’s (NASDAQ:FIVN) ability to offer a comprehensive suite of contact center software solutions, including AI and automation, is a key differentiator in the market and is expected to drive its growth and profitability. Five9 (NASDAQ:FIVN) recently announced a major client win, which is expected to contribute $50 million in annual recurring revenue (ARR) for the next few years.
Additionally, in Q1, Five9’s (NASDAQ:FIVN) earnings report showed an EBITDA margin of 15.2%, which was 110 basis points above the consensus estimate. This margin expansion is a positive sign for the company’s profitability, and it is expected to continue to improve in the future. The company aims to achieve an EBITDA margin of 23% or higher by 2027 and has multiple levers to achieve this goal, including economies of scale, an increase in subscription revenue, and the growth of its AI and automation offerings. Brown Capital Management stated the following regarding Five9. (NASDAQ:FIVN) in their Q2 investor letter:
“Five9, Inc. (NASDAQ:FIVN) is a leader in cloud-based contact center software, which serves as the routing engine to connect callers to agents. With the growth of e-commerce, consumers are making fewer in-person visits to stores but contacting companies more frequently, driving the need for world-class contact-center software solutions like Five9’s. It has been a tough couple of years for Five9’s stock, and this quarter provided no relief. Competitive concerns, questions about AI’s long-term impact on the business, and deteriorating macroeconomic conditions have all cast clouds over the company’s stock. Five9’s consumer segment, one of its largest divisions, has really struggled of late as clients hire fewer call center agents, pressuring Five9’s seat-based revenue model. Total revenue growth decelerated to 13% year-over-year in the most recent quarter, down from 28% and 17% in 2022 and 2023, respectively. Moreover, management guided to 16% for the full year 2024, which some consider optimistic given the weak start to the year. These worsening sales trends further weighed on shares during the quarter.
Looking through the current industry doldrums, we see a bright future for Five9. The company inked its largest deal ever during the quarter, which will generate more than $50 million in annual revenue once fully rolled out. We believe this is an important signal of Five9’s long-term potential. The company is attacking a $60 billion market opportunity, is winning new business at industry-leading rates, and is gaining share from legacy incumbents stuck with antiquated technology. We continue to assess the potential threat of AI, but so far, it has provided an uplift to company results. The company’s AI product is very popular with large enterprises as it assists agents with customer interactions and can sometimes be used to fully automate interactions. Far from shrinking the number of industry seats, as some fear, management said revenue per seat doubles when customers adopt their AI applications. We expect sales growth to pick up markedly in the coming years, which should result in much stronger stock performance.”
Five9 (NASDAQ:FIVN) strong growth prospects demonstrate its ability to grow as more businesses adopt cloud-based communication solutions.
Overall FIVN ranks 4th on our list of cheap software stocks to invest in. While we acknowledge the potential of FIVN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FIVN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
