The software industry is booming with continuing digital transformation and remote activities. However, Wall Street analysts believe the shares of MongoDB (NASDAQ:MDB), Appian (NASDAQ:APPN), and Fastly (NYSE:FSLY) have hit valuations that are far ahead of their financials and growth prospects. So, we think these stocks are best avoided now. Read on.The software industry generated solid growth last year on a COVID-19 pandemic-driven increase in dependency on software solutions. That trend has been continuing this year with increasing adoption of advanced software in almost every industry as part of broad digital transformation efforts. According to Grand View Research, the global business software and services market is expected to grow at an 11.3% CAGR between 2021 -2028.
Investors’ increasing interest in software stocks is evident from the SPDR S&P Software & Services ETF’s (XSW) 8.9% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 2% gains. However, this has led to sky-high valuations for some of the software stocks.
The valuations of MongoDB, Inc. (MDB), Appian Corporation (APPN), and Fastly, Inc. (FSLY) at their current price levels are not justified by their financials and growth prospects. In fact, Wall Street analysts believe these stocks could continue declining in the near term. So, we think it’s wise to avoid these stocks now.