Software stocks have a reputation for being high-flyers. Add in the fact that the demand for software has never been greater, and it is easy to understand why big money gravitates to software stocks. A rising industry tide certainly tends to lift all boats, yet there are simply some software stocks that are unworthy of your hard-earned investing dollars.

Carefully sort through the software stocks that analysts have recently downgraded, and you will find some interesting names. It appears as though the analysts believe some software companies are overvalued and likely to suffer a meaningful decline.

Let's square our focus on two specific software stocks that were recently downgraded. Below, we delve into Five9 (FIVN) and Medallia (MDLA), both of which qualify as software stocks retail and institutional investors should avoid, at least in the short term.

Five9 (FIVN)

Based in San Ramon, California, FIVN's value offering is cloud software used by contact centers. FIVN's software products include predictive dialing, speech recognition, workforce management, voice applications, and more. The company even has a virtual cloud platform contact center that serves as a hub for interactions. The end result is more of a unified approach to customer interaction and problem-solving. 

FIVN clients span a litany of industries, including healthcare, business process outsourcing groups, financial services providers, and more. FIVN was recently downgraded to a Hold rating by Truist Securities. The stock's price target was also reduced to $212. The downgrade occurred on August 9. The POWR Ratings echo the analyst sentiment noted above. 

FIVN has an overall grade of D, which translates into a Sell rating in our POWR Ratings system. 

The stock also has Ds in the Quality and Value components of the POWR Ratings and Cs in the Momentum and Growth components. You can find out how FIVN grades in the remainder of the components, including Sentiment and Stability, by clicking here. Out of the 143 stocks in the D-rated Software - Application industry, FIVN is ranked 10th. You can find the top stocks in this industry by clicking here. FIVN also has a forward P/E ratio of just under 198, meaning it is very overpriced. 

Click here to check out our Software Industry Report for 2021

Medallia (MDLA)

MDLA is a Software-as-a-Service platform provider for businesses in North America, the Middle East, Europe, and Africa. The company's clients are provided with a convenient and easy-to-use platform for learning-based AI tech that breaks down data from a plethora of signal fields. MDLA clients are in a wide range of industries, including the financial, retail, manufacturing, tech, media, insurance, hospitality, and auto spaces.

Truist Securities recently downgraded MDLA to a Hold. The stock now has a $34 price target. This downgrade was made on August 9. MDLA has an overall grade of D and a Buy rating in our POWR Ratings system. The company has a grade of F in the Sentiment component and D grades in the Quality and Value components. You can find out how MDLA fares in the Momentum, Stability, and Growth components by clicking here.

Of the 59 stocks in the Software - Business industry, MDLA is ranked 52nd. However, you can find the top stocks in this industry by clicking here. MDLA has a beta of 1.54, which means it is more than 50% volatile than the market. There were some rumors that MDLA would be acquired. However, it has been two months since those rumors initially surfaced, and they have yet to be confirmed. Add in the fact that MDLA is not yet in the black in terms of profit, and there is much more reason to avoid the stock.

FIVN shares were unchanged in premarket trading Thursday. Year-to-date, FIVN has gained 9.35%, versus a 19.41% rise in the benchmark S&P 500 index during the same period.

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management.

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