Even though the software industry’s prospects look promising thanks to the ongoing digital transformation, not all stocks are well positioned to benefit from the industry tailwinds. Shares of software companies SecureWorks (NASDAQ:SCWX) and Materialise (NASDAQ:MTLS) look extremely overvalued at their current price levels, and Wall Street analysts expect them to witness a significant retreat in the near term. So, we think it is better to avoid these two stocks now. Read on.The continuation of remote working, even as the COVID-19 pandemic abates, and the ongoing digital transformation have been driving the software industry’s relentless growth. Investors’ increasing interest in software stocks is evident in the SPDR S&P Software & Services ETF’s (XSW) 7% returns over the past month compared to the SPDR S&P 500 Trust ETF’s (SPY) 2.4% gains.
The growing demand for advanced software products and services from almost every industry should help the software industry keep growing in the coming months. According to Grand View Research, the global business software and services market is expected to grow at an 11.3% CAGR between 2021 - 2028. However, the software industry is overcrowded with small players vying for market share. So, every company in this space may not be able to capitalize on the industry tailwinds.
SecureWorks Corp. (SCWX) and Materialise NV (MTLS) are currently trading at valuations that are not justified by their financials and growth prospects. In fact, Wall Street analysts expect these two stocks to suffer price declines in the near term. So, these stocks are best avoided now.