1 Software Stock on Our Buy List and 2 We Avoid

Software is rapidly reducing operating expenses for businesses. This secular theme has materialized in superior earnings growth and stock price performance for most SaaS companies, and over the last six months, the industry's 45.5% return has topped the S&P 500 by 24.4 percentage points.

Nevertheless, investors should tread carefully as AI will commoditize many software products, and backing the wrong horse could result in hefty losses. On that note, here is one software stock poised to generate sustainable market-beating returns and two best left ignored.

Originally named after Adobe Creek that ran behind co-founder John Warnock's house, Adobe (NASDAQ:ADBE) develops software products used for digital content creation, document management, and marketing solutions across desktop, mobile, and cloud platforms.

Average billings growth of 11.9% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand

Estimated sales growth of 9.4% for the next 12 months implies demand will slow from its two-year trend

Operating margin failed to increase over the last year, indicating the company couldn't optimize its expenses

Adobe is trading at $233.26 per share, or 3.2x forward price-to-sales. Check out our free in-depth research report to learn more about why ADBE doesn't pass our bar.

Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ:BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.

Annual revenue growth of 11.9% over the last two years was below our standards for the software sector

Gross margin of 37.2% is way below its competitors, leaving less money to invest in areas like marketing and R&D

Operating margin was unchanged over the last year, suggesting it failed to gain leverage on its fixed costs

Bandwidth's stock price of $62.25 implies a valuation ratio of 2.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than BAND.

Using over 2,500 data variables and trained on nearly 82 million repayment events, Upstart (NASDAQ:UPST) is an AI-powered lending platform that uses machine learning to help banks and credit unions more accurately assess borrower risk for personal loans, auto loans, and home equity lines of credit.

Loan originations on its platform are soaring as they averaged 54.3% growth over the last year, enabling the company to collect more fees and expand into new markets like credit cards.

Market share will likely rise over the next 12 months as its expected revenue growth of 30.8% is robust

Free cash flow is expected to be positive next year, meaning the company has reached a critical turning point

At $23.25 per share, Upstart trades at 1.6x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it's free.

ONE MORE THING: Top 5 Growth Stocks. The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively.

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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+1,154% between June 2020 and June 2025). Find your next big winner with StockStory today.