Bill Burnham writes: “Owning software stocks can be a frustrating experience. Just when you think they can do no wrong, they often miss their earnings and fall like a rock only to rise up over the next few quarters and then have that renewed optimism crushed yet again by another earnings miss. It can, and has, driven many a software investor crazy…In the face of such volatility, knowing when to get out of software stock is critically important. Given this importance, I thought I would provide a list of the Top 10 Early Warning Signs that a software stock is about to crater.”
1. It capitalizes software development expenses.
2. DSOs are greater than 95 days.
3. License revenues account for less than of overall revenues and are declining.
4. It reports more than 30 days after the end of the quarter.
5. EBITDA Margins are less than 10%.
6. It does not provide a cash flow statement when it announces earnings.
7. It misses ship dates.
8. Its deferred revenues are declining.
9. The head of sales and marketing leaves.
10. Competitors miss their forecasts.