Shareholders of Agilysys would probably like to forget the past six months even happened. The stock dropped 25.2% and now trades at $77.01. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Agilysys, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Agilysys Not Exciting?

Despite the more favorable entry price, we don't have much confidence in Agilysys. Here are two reasons why AGYS doesn't excite us and a stock we'd rather own.

1. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Agilysys, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Agilysys’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 62.7% gross margin over the last year. Said differently, Agilysys had to pay a chunky $37.32 to its service providers for every $100 in revenue.

2. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Agilysys’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 21% for the last 12 months will decrease to 16.7%.

Final Judgment

Agilysys isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 6.9× forward price-to-sales (or $77.01 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our all-time favorite software stocks.

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