Three Software Stocks Struggling to Justify Their Valuations in 2026

Software Sector Faces Headwinds as Three Companies Draw Scrutiny

The software sector has been navigating choppy waters in 2026, with the industry declining 10.4% over the past six months — a significant underperformance compared to the S&P 500's 10.9% gain over the same period. While the broader SaaS narrative remains compelling, driven by enterprises aggressively cutting operating costs through automation and cloud tools, not every company in the space has managed to back up its premium pricing with strong fundamentals. Three names in particular — Commerce (NASDAQ: CMRC), Health Catalyst (NASDAQ: HCAT), and Teradata (NYSE: TDC) — are drawing attention for the wrong reasons.

Commerce (CMRC): Sluggish Growth at a Discount Price

Commerce, a founding member of the MACH Alliance that promotes modern composable technology standards, offers a SaaS platform helping businesses build online storefronts, connect to marketplaces, and integrate with point-of-sale systems. With a market cap of $221.1 million and a share price of $2.80, the stock trades at just 0.6x forward price-to-sales — a figure that reflects investor skepticism rather than opportunity.

The underlying data paints a cautious picture. Annual recurring revenue grew only 2.5% over the past year, signaling difficulties in both customer acquisition and retention. Looking ahead, projected revenue growth of just 3.3% over the next 12 months suggests demand remains soft. Compounding the concern, the company's free cash flow margin is expected to contract by 3.2 percentage points in the coming year, indicating that CMRC may need to spend more capital simply to maintain its competitive position.

Health Catalyst (HCAT): Thin Margins in a Crowded Market

Health Catalyst, which markets itself around its proprietary "Health Catalyst Flywheel" methodology, provides data analytics technology and services to healthcare organizations. The company targets measurable improvements in clinical, financial, and operational outcomes — a mission with real-world relevance, but one that hasn't translated into strong financials.

Currently trading at $1.77 per share with a market cap of $121.2 million, HCAT is priced at 0.5x forward sales. Billings have been essentially flat over the past year, raising questions about whether the company needs to refine its product offering, pricing strategy, or go-to-market approach. Its gross margin of 50.4% stands as one of the weakest among software peers, reflecting both steep infrastructure costs and challenging unit economics. Long payback periods on sales and marketing investments further limit the pace at which the company can expand its customer base — a dynamic that analysts note is characteristic of highly competitive market environments.

Teradata (TDC): Legacy Giant Under Pressure

Teradata has been a fixture in enterprise data since the 1980s, having pioneered data warehousing long before "big data" entered the mainstream lexicon. Today, the company provides cloud-based data analytics and AI platforms designed for large enterprises managing complex, multi-environment data architectures. With a market cap of $3.09 billion and shares at $31.75, TDC trades at 1.9x forward price-to-sales.

Despite its storied history, recent performance indicators raise questions about the company's trajectory. Average billings growth of just 3.7% over the past year failed to inspire confidence, while declining revenues led to a 7.2 percentage point compression in operating margin — a sign that the company has struggled to adjust its cost structure in response to changing demand. Perhaps most notable is the projected 20.2 percentage point decline in free cash flow margin expected in the coming year, which analysts suggest reflects planned investment increases as Teradata works to defend its market position against more agile competitors.

What Investors Should Watch

The broader software sector's recent underperformance highlights a critical distinction investors are making: the difference between companies benefiting from genuine secular tailwinds and those simply carried by the narrative. As enterprise software spending remains robust overall, companies with stagnant ARR, deteriorating margins, and weak billings growth may find it increasingly difficult to compete for investor capital.

For all three companies, the key metrics to monitor in upcoming quarters include billings acceleration, free cash flow trajectory, and gross margin improvement. Any meaningful movement in these areas — in either direction — could significantly reshape how the market prices these names going forward.