After an exceedingly difficult year, Software-as-a-Service (SaaS) stocks continue to power the interconnected globe. SaaS is a fancy way of explaining how clients obtain software application solutions through the Internet. To the provider, the license and distribution model is often a subscription. This decreases the startup expenses for customers in the early phase of deploying software solutions in their firm.
The COVID-19 pandemic led to the rise of many things — the retail investor, to-go margaritas, and virtual rap bouts, to mention a few. But potentially, the largest winner of the epidemic has been companies in the work-from-home industry and software-as-a-service (SaaS) enterprises.
Corporate customers require SaaS more than ever. Remote working accelerated the adoption of software via the cloud. For example, email, customer relationship management, cybersecurity solutions, and instant messaging are some of the products that organizations discovered a sudden need in. There are certain SaaS stocks investors might explore.
What is a SaaS?
SaaS, often known as software as a service, is one of the most interesting businesses for investors. With the widespread shift away from conventional license-based software models and the quick ascent of the cloud, dozens of innovative new businesses are reshaping the global business landscape with these high-margin platforms. SaaS is a fancy term for how customers gain access to software application solutions via the Internet. Typically, the license and distribution strategy for the provider is a subscription. This reduces the startup expenses for customers who are just beginning to implement software solutions for their business.
SaaS businesses utilize a subscription model and cloud computing to deliver their services. SaaS is a cloud-based platform whose business strategy is software cloud access. Instead of selling copies of their goods to customers and clients, SaaS companies are revolutionizing the way we use software by granting us access to cloud-based resources. These businesses bill their customers on a periodic basis, which may be up to a year in advance, offering more revenue predictability.
SaaS providers offer their services online, and updates can be done from any location. Enterprise customers require SaaS more than ever before and working remotely hastened the uptake of cloud-based software. Email, customer relationship management, cybersecurity solutions, and instant messaging are examples of products that businesses have experienced a significant increase in demand for. The majority of businesses utilizing this business model acquire new customers through monthly subscription plans, which are frequently offered at different membership tiers or levels. The onset of the pandemic has accelerated the growth of SaaS stocks with established business models and substantial moats during the past two years.
SaaS companies provide valuable services to consumers today. These companies aid in the development of well-known platforms like Netflix.
SaaS will grow in importance over the coming decades as the world's dependence on technology increases. With this, we anticipate robust revenue growth in the industry.
There are numerous well-known SaaS companies with big market capitalizations as well as risky but potentially rewarding SaaS stocks available today. Before adding a particular SaaS stock to your portfolio, you still need to conduct thorough due diligence and research.
Numerous investors use the price-to-earnings (P/E) ratio to analyze a firm, but this analysis is not always practical because many SaaS startups are not yet profitable. Rather, you can evaluate the following two key metrics:
Customer acquisition cost
How much does a SaaS business spend to attract each new client? You may examine whether the ratio of sales and marketing expenses to revenue is decreasing over time by calculating this ratio. If not, the company may be growing yet spending excessively to get new customers.
Price-to-sales ratio
In place of the P/E ratio, the price-to-sales (P/S) ratio, which equals a company's market capitalization divided by its yearly revenue, is frequently used to value SaaS companies. A greater P/S ratio indicates investor optimism that the company's favorable sales growth will continue and that it will eventually earn profits.
Regardless of the quality of the firm or its growth prospects, a P/S ratio that is excessively high should be regarded with caution. SaaS high-fliers such as Shopify (NYSE: SHOP), Zoom (NASDAQ: ZM), and Datadog (NASDAQ: DDOG) trade for between 23 and 65 times sales, multiples that necessitate considerable optimism to justify. Adobe's P/S ratio is approximately 20, whereas Microsoft's P/S ratio is approximately 13.
1. Adobe
Adobe (NASDAQ: ADBE), best known for creative software such as Photoshop, sets industry standards. There are cheaper and even free competitors to Adobe, but this has not been sufficient to disrupt the software giant's market dominance.
Adobe said in 2013 that it would cease releasing new versions of its standalone creative software in favor of selling subscription solutions. Adobe's fiscal year 2020 revenue reached approximately $13 billion, up from $4 billion in the fiscal year 2013. The company's software is now accessible to a considerably larger audience as a result of the switch from selling one-time licenses for hundreds of dollars to selling subscriptions for as little as $10 per month.
Adobe's stock, like Microsoft's, is historically expensive. Nonetheless, the corporation posted record sales and profits throughout the epidemic, and this steady growth has continued into 2021. In the third quarter, both revenue and earnings per share increased by 22% and 28%, respectively, and the company anticipates similar growth for the remainder of the year. Adobe's dominance is as strong as it has ever been, and this is unlikely to change.
2. Cloudflare (NYSE: NET)
Since the pandemic, many businesses have transitioned to internet platforms. And it would be detrimental to these businesses if their websites were hacked or went offline, and Cloudflare offers such businesses peace of mind.
It is a network security solution that offers content delivery network (CDN) and DDoS mitigation services, thereby securing and ensuring the dependability of websites, APIs, and applications.
It essentially prevents hackers and identity theft while allowing websites (and applications) to run efficiently and swiftly.
In addition, it is simple to set up; businesses do not need to employ developers to utilize its services. This significantly reduces the barrier to registration.
Cloudflare has been in the industry since 2009, but it only went public in 2019, and it has continued to develop since then. Cloudflare has (and continues to) provide a free tier for small businesses and independent website owners since its inception.
As of 3Q2021, they reported an increase of 170 customers (15.5%) in their 'big' customer group. Large customers are defined as those who annually spend at least $100,000.
Fastly, another popular tech stock that also provides content delivery network services is Cloudflare's chief competition.
Cloudflare grew by 54 percent year-over-year in the most recent quarter and is currently trading at an EV/(Revenue next 12 months) of 30.4%.
3. DocuSign (NASDAQ:DOCU)
Globally, many contracts are signed and acknowledged every day, and DocuSign's eSignature service facilitates the safe digital processing of these transactions.
They let businesses eliminate paper contracts and documentation, saving time and eliminating the hassle of storing and maintaining a physical contract database. Additionally, additional sales can be conducted remotely without concern for security or downtime.
DocuSign's growth since the introduction of Covid was comparable to that of many remote working companies. Users are likely to continue utilizing its services because of the businesses it provides to business workflows.
DocuSign is a market leader, with a 42 percent compound annual growth rate (CAGR) in total customers and a large number of Fortune 500 clients. In addition to its signature services, it also enables customers to automate their complete agreement and contract management while providing data that could improve procedures.
DocuSign grew by 35% year-over-year in the most recent quarter and is currently trading at an EV/(Revenue next 12 months) ratio of 8.9%.
4. Microsoft
Microsoft (NASDAQ: MSFT) has controlled the market for traditional software for 45 years. Microsoft Windows is the standard operating system for personal computers, and Microsoft Office remains the most popular office suite.
Microsoft's supremacy was challenged by the rise of mobile devices that do not run Windows and by competition from Alphabet's (NASDAQ: GOOG), Google's Google Docs, Sheets, and Slides. Microsoft subsequently abandoned its PC-centric strategy by bringing superior versions of its Office applications to mobile devices and releasing Office 365, a subscription version of Office.
With around 52 million consumer customers to Office 365, Microsoft has maintained its dominance in the productivity software market. Microsoft's other SaaS offerings include Teams, the company's collaboration software, which acquired subscribers rapidly during the pandemic. Teams strive to be a one-stop-shop for collaboration by providing group chats, video conferences, and numerous more capabilities.
Microsoft is not a pure-play SaaS company, and its stock has historically been overvalued relative to earnings. But the corporation was able to preserve its market domination while transitioning to subscription-based software sales. Despite the waning pandemic's impact on the market for SaaS products, both revenue and profits have been expanding rapidly.
5. Okta
Okta, Inc. offers identity management platforms to enterprises, small and medium-sized businesses, universities, non-profit organizations, and government agencies in the United States and overseas. Okta, Inc. was established in 2009 and currently has its headquarters in San Francisco, California.
Okta Identity Cloud is a platform that provides a suite of products to manage and secure identities, such as Universal Directory, a cloud-based system of record to store and secure user, application, and device profiles for an organization; and Single Sign-On, which enables users to access their on-premise or cloud-based applications with a single entry of their user credentials.
It also offers Adaptive Multi-Factor Authentication, which provides an additional layer of security for cloud, mobile, and Web applications and data; Lifecycle Management, which enables IT organizations or developers to manage a user's identity throughout its lifecycle; API Access Management, which enables organizations to secure APIs; Advanced Server Access to secure cloud infrastructure; and Access Gateway, which enables organizations to extend the OAuth 2.0 protocol. The company also provides customer assistance, training, and professional services.
6. Palantir Technologies Inc. (NYSE: PLTR)
Even when businesses acquire data about their operations, they frequently lack the ability to adequately analyze it. Palantir Technologies is a software developer that assists enterprises in integrating data, choices, and processes.
In turn, this makes businesses more efficient, productive, and profitable. The services offered by Palantir are deployable across three different operating systems.
Just last month, Palantir Technologies announced growth in the South Korean market, expanding its reach even further. Revenue and earnings per share for each quarter of the past year have exceeded the quarterly targets. Palantir is preparing for a prosperous 2022, which may benefit those who invest now.
7. Paycom Software
Paycom Software, Inc. offers cloud-based human capital management (HCM) software to small and medium-sized businesses in the United States. Paycom Software, Inc. was founded in 1998 in Oklahoma City, Oklahoma, and is headquartered there.
It provides businesses with the capability and data analytics required to manage the whole employment life cycle, from recruitment to retirement.
The company's HCM solution provides a suite of applications for talent acquisition, including applicant tracking, candidate tracking, background checks, on-boarding, e-verify, and tax credit services; and time and labor management, including time and attendance, scheduling exchange, time-off requests, labor allocation, labor-management reports/push reporting, and geofencing.
Its HCM solution also includes payroll applications, such as payroll and tax management, Paycom pay, expense management, mileage tracker/fixed and variable rates, garnishment management, and GL concierge applications; talent management applications, such as employee self-service, compensation budgeting, performance management, Paycom learning, and course content, and my analytics, which provides employment predictor reporting.
In addition, the company's HCM solution includes HR management applications, such as manager on-the-go, which enables supervisors and managers to perform a variety of tasks, such as approving time-off requests and expense reimbursements; direct data exchange; ask here, a tool for a direct line of communication to ask work-related questions; document and checklist; government and compliance; benefits administration/benefits to the carrier; COBRA administration; personnel administration; and personnel records management.
8. Salesforce.com (CRM)
This article's headline promised SaaS stocks with steady returns to purchase. I'm not trying to deceive anyone here, and Salesforce.com should be a part of your portfolio.
The stock's valuation is one incentive to evaluate it. At the beginning of the year, CRM stock was trading at nearly ten times its anticipated sales for fiscal 2021, and numerous stocks in this industry are valued considerably higher.
Salesforce operates in the big data industry. The company's software helps businesses collect, among other things, real-time customer data. According to Gartner Research, beginning in 2020, Salesforce owned around 18 percent of the worldwide CRM market.
With the impending acquisition of Slack Technologies (NYSE: WORK), the company will have an additional sales channel. However, it will need to demonstrate to investors how Slack complements the company's key skills. This has prompted some investors to abandon Salesforce in favor of lesser growth stocks in the sector. Since the announcement of the deal, the CRM stock price has decreased by around 14%.
However, if you seek consistency, Salesforce is the solution for you. And you may have an intriguing opportunity to purchase CRM stock as it falls from its recent highs.
9. Shopify (SHOP)
Shopify is the next SaaS stock on my list, continuing with the obvious pattern. SHOP stock has gained more than 250 percent in the past ten months, and this coincides with the beginning of the mitigation steps that led to the closure of numerous physical stores.
SHOP stock is as pure a play as one can get. This has always been a subscription-based service, and customers pay a monthly subscription to gain access to the platform and the company's suite of tools for building and managing online stores.
Due to three factors, the corporation was a huge winner during the pandemic. When brick-and-mortar stores closed, e-commerce systems had to be created or updated expeditiously by a number of businesses. Second, many individuals have taken advantage of the pandemic to launch their own e-commerce businesses. Third, many of these customers were seeking alternatives to Amazon.com (NASDAQ: AMZN).
Similar to Salesforce, Shopify appears to be a stock that will continue to profit when the pandemic subsides. Due to the underlying trend toward e-commerce, which will continue for reasons of convenience and not public health, this is the case.
10. Zoom Video Communications (ZM)
Zoom Video Communications, Inc. offers unified communications platforms in the Americas, Asia-Pacific, Europe, the Middle East, and Africa. Zoom Meetings provides HD video, voice, chat, and content sharing on mobile devices, desktops, laptops, telephones, and conference room systems; Zoom Phone is an enterprise cloud phone system; and Zoom Chat allows users to share messages, images, audio files, and content on desktop, laptop, tablet, and mobile devices.
The Zoom Video Communications share price began the day at $92.62 after closing the previous session at $90.94. The most recent cost was $99.74 (25-minute delay). Zoom Video Communications is a NASDAQ-listed company with trailing 12-month sales of around $4.1 billion and 6,787 employees.
Wrapping up
Stocks of SaaS companies are unquestionably lucrative for investors willing to invest research time. These businesses provide a great lot of flexibility to their partners and customers, which adds to the rapid growth of the technology industry. Individual clients and companies can now rely on software service providers to accomplish success and income growth instead of building their own applications, hardware, space, and personnel.
Several analysts, investors, and industry professionals have been tracking various SaaS stocks as new applications for their products arise, especially in the wake of the COVID-19 outbreak. Through platforms that have never been as accessible, SaaS enables productivity and cooperation.
Adding SaaS stocks to your portfolio could be useful if you, as an investor, recognize the market expansion potential of these stocks. Before investing in SaaS stocks, it is vital to undertake research, as with any other stock market investment.
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