Software-as-a-Service (SaaS) stocks have been the best performers in 2020. Despite the current negative sentiments, we believe that the transition from on-premise systems to the cloud is in motion and there’s no going back.
Companies need to be more nimble now and subscribing to SaaS helps them avoid the large investments required for on-premise systems. Not only capital are locked up with the equipment, it would be difficult to reverse it when the company takes on a new direction, which could render the equipment useless. So it is a matter of time until majority of the enterprises switch to the SaaS model. There’s still a lot of investment opportunities in SaaS in case you are wondering if you are late to the game.
The number of SaaS stocks have ballooned in recent years, capitalizing on the insatiable appetite of the investors. But not all SaaS companies are good and conventional investment metrics are often not the best way to analyse SaaS stocks. For example, a profitable SaaS company may not be better than a loss-making SaaS company. And PE ratio is meaningless with a loss-making stock.
Public Comps is an excellent site that offers analysis on SaaS stocks. A free account provides a number of metrics for you to play around. The paid version is likely to be an overkill if you are not familiar with SaaS yet.
Public Comps has identified the top 10 SaaS stocks on its site based on their criteria (which I have no luck trying to uncover).
It is a good starting point if you are dipping your toes into the world of SaaS. Here’s the list:
This article was first published in 2020, and has been updated on 15 Mar 2022.
#10 Zoom (NASDAQ:ZM)
Zoom has become a verb and an adjective in video conferencing, just like what Google is for search. Covid-19 was a boon for Zoom as teams needed to coordinate and discuss remotely during the lockdowns.
Dr Wealth is a customer of Zoom too and you might have even attended one of our webinars via the platform.
Zoom isn’t the most revolutionary software today as many provide such video conferencing services – some of the big names include Cisco (WebEx), Google (Meet) and Microsoft (Teams). So, how did Zoom cut a market share for itself?
I think it is because Cisco has such an entrenched large corporate customer base, they couldn’t even be bothered by Zoom, whereas Google and Microsoft believed that their product bundle (with email, office productivity suite and cloud storage) are too sticky for anyone to switch. Hence, they paid little attention to the video software and made little improvements to it – they have many billion dollar businesses to look after by the way.
That’s where Eric Yuan (founder of Zoom) found a gap. He was previously from Cisco and at some point he was ashamed when customers questioned about the software usability. The only way to change it is to leave the organization to start his own. He did and the rest is history.
That said, the chances of success ain’t that high. It doesn’t mean that any startup that observed a gap in the market will automatically enjoy a windfall. The internal execution must be great and the external environment must be favorable.
Well, Zoom definitely had both on its side. Eric executed well and really focused on the users, making Zoom the most user friendly video conferencing software in the market for the most diverse customer base. With a stroke of luck, Covid-19 made it rain gold into Zoom’s bank account.
Zoom grew 21% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 15.3%.
#9 DocuSign (NASDAQ:DOCU)
Everyday countless contracts are being signed and acknowledged around the world and DocuSign helps to securely process these processes digitally through its DocuSign eSignature service.
They allow businesses to do away with hardcopy contracts and documents which saves time and removes the headache of filing and maintaining a physical database of contracts. Plus more sales can be done remotely, without worrying about security and downtime.
Like many of the remote working stock, DocuSign had experienced a huge growth since the onset of Covid. With the convenience it breaks to the workflow of businesses, users are likely to continue using its services.
DocuSign is a leader in its space, growing its total customers by 42% CAGR and serving many of the Fortune 500 companies. On top of its eSignature services, it also allows customers to automate their entire agreement and contract management while offering analytics which could help improve processes along the way.
DocuSign grew 35% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 8.9%.
#8 Shopify (NYSE:SHOP)
Shopify is the antithesis of Amazon – while Amazon aggregates all the products and sellers on its platform, Shopify decentralizes selling and simply offer individuals an easy way to set up their digital shop front. If Amazon is NTUC Fairprice supermarket, Shopify is Econ minimart (it is still around if you are wondering).
Shopify provides a turnkey solution for anyone who wants to do all of the following in one place:
- sell something online,
- collect payment via their own storefront (physical retail as well),
- market their products on social media,
- sell on major e-commerce platforms, and
- track their sales and inventories.
Nowadays, a business can’t do without a web presence even if it is primarily a brick-and-mortar one. Even restaurants saw the need to get online and sell deliveries during the lockdown period. Retail shops were scrambling to put themselves on the digital world when they couldn’t open in their physical locations.
Increasingly, every business is trying to get in front of customers on a variety of platforms. Instead of building another e-commerce platform, Shopify sells ‘shovels and picks’ to the e-commerce gold miners. Small medium enterprises pay Shopify a subscription fee to use the software to operate their businesses online.
Shopify grew its revenue by 41% in the recent quarter compared to a year ago and it is now trading at EV/Revenue next 12 months of 9.6x.
#7 Cloudflare (NYSE:NET)
Since the pandemic, many businesses have gone digital. And it would be bad for these businesses if their websites got hacked or goes down. Cloudflare offers a peace of mind for such businesses.
It is a network security solution that provides content delivery network (CDN) and DDoS mitigation services which helps to secure and ensure the reliability of websites, APIs and applications.
Basically, it prevents hackers and identity theft while allowing websites (and applications) to run quickly and smoothly.
It is relatively easy to set up too, businesses do not have to hire developers in order to use its services. This greatly reduces the barrier of signing up.
Cloudflare has been in the industry since 2009 but only went public in 2019 and it has continued to grow even after it went public. Since its early days, Cloudflare has been (and continues to) provide a free tier for smaller businesses and independent website owners.
As of 3Q2021, they reported a growth in their ‘large’ customer segment by 170 customers (~15.5%). ‘Large’ customers are defined as those who spend at least $100,000 per year.
Cloudflare’s biggest competitor is another popular tech stock, Fastly which also provide content delivery network services.
Cloudflare grew 54% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 30.4%.
#6 Twilio (NYSE:TWLO)
Twilio is not exactly a SaaS but more of a Platform-as-a-Service (PaaS). This means that you would need programming knowledge to build useful applications on top of it. You can pretty much customize the features you want on Twilio or integrate it with other software such as Microsoft BI. Hence, unlike a SaaS, you can’t subscribe and expect it to be user friendly to a non-programmer.
Twilio is a one-stop platform to manage all your communications, be it email, SMS, phone call, video call, WhatsApp, Messenger and more. This would help a lot of businesses automate replies to customers. I can think of e-commerce and delivery services where businesses need to confirm customers’ orders and schedule delivery timings. Given the volume of orders, it would require a massive team of humans to message manually. Twilio automates and enables a leaner workforce, thereby saving costs for the companies.
But it isn’t just about automating but also enabling customer service staff to engage the customers better. For example, the same customer may communicate with a business via Messenger at the first touchpoint but uses email to reply subsequently. Twilio will track these interactions and any customer service staff would be able to quickly know how to pick up the conversation from where it left off.
Twilio grew 54% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 7x.
#5 CrowdStrike (NASDAQ:CRWD)
Security is something that everyone needs but often takes for granted – we don’t see anything wrong if security is doing its job while we would definitely be horrified when security fails. This applies from national defence, right down to the local security of your residence and office.
Cybersecurity has to keep up with all the activities in the digital world. More data and transactions are being done digitally and it has become more lucrative for hackers to steal information and siphon money. Lax cybersecurity measures just makes the job easier for the hackers. Did you realize that stolen customer details episodes have been rising?
CrowdStrike is a cybersecurity SaaS that secures your end-point devices (laptops, desktops, tablets and smartphones). Gone are the days where you buy a security software and update the virus definition on your device. It is a lot more convenient to have the software on the cloud so that the update happens in one place and replicated for all devices. You just need to pay a subscription to be protected.
Almost everyone owns an internet-enabled device in a modern city and sometimes these devices are connected to the workplace IT environment. This introduces multi-access points and vulnerabilities for the hackers to exploit. The transition to work from home due to Covid-19, introduced a whole new realm of vulnerabilities.
Hence, companies who need to protect sensitive information would consider subscribing to CrowdStrike to ensure that every device that is accessing the companies’ networks is monitored. This becomes a necessary perennial tool going forward.
CrowdStrike grew 63% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 19.7x.
#4 Zscaler (NASDAQ:ZS)
Some of these SaaS companies can be quite technical and difficult to understand – Zscaler falls into this category. I am not an expert in IT and cybersecurity but I’ll try my best.
The easiest way is to think of Zscaler, is as a gatekeeper. While CrowdStrike secures the devices, Zscaler secures the network. It acts as an intermediary between your company’s network and the bigger internet, monitoring the traffic in and out of it.
The challenge is to stop malicious attacks while allowing legitimate users to pass through, without slowing them down.
Zscaler grew 63% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 27.5x.
#3 Datadog (NASDAQ:DDOG)
Unless you are a programmer (in particular those who are in charge of DevOps or IT operations), you wouldn’t have any use for Datadog.
I am not a programmer myself so you would notice that I do not have much to say about Datadog here. The superficial knowledge that I have is from Dr Wealth’s small setup to build our stock app.
Agile software development allows smaller startups to innovate faster than the big incumbents. The process of software development has shortened considerably and deployment onto the live site has to be fast, seamless and yet stable enough to not crash the system.
DevOps is a role that emerged from this agile framework that aims to allows software to iterate quickly – put the changes out, track user behavior and make changes again. You would notice some apps have new features and functionalities very regularly and that’s because they run agile development.
Since you are messing with the actual live site, you don’t want any downtime and Datadog exists to make DevOps’ lives easier. One can monitor the activities on the live site, pinpoint any instability or even offer predictive analysis on the overall network all on one platform.
Datadog grew 84% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 25.6x.
#2 Monday.com (NASDAQ:MNDY)
Monday.com brands themselves as the Work Operating System (Work OS). The platform helps businesses and teams to compile, share and optimise their workflows collaboratively and transparently.
As a Work OS, monday.com allows users to integrate across a wide selection of software and to create automations within the platform, without having to know how to program or code.
Users can also mark the progress of a task and easily hand it off to the next person. Instead of having to manually email a department or a colleague, teams can set up automations that immediately notifies the relevant parties when certain statuses are flagged.
We are users ourselves; we use it primarily as a CRM solution.
Monday.com grew 91% in the recent quarter compared to a year ago and it is now trading at EV/(Revenue next 12 months) of 9.5.
#1 Snowflake (NYSE:SNOW)
Data is the new oil.
Snowflake provides corporate users with cloud-based a data warehouse and analytics service. It helps corporate clients to store and analyse their data efficiently in order to make better decisions.
They aim to build a robust ecosystem that would eventually serve every company that runs machine learning or artificial intelligence computations.
Sounds ambitious?
I dived into its fundamentals earlier this year, you can watch the analysis here:
As of their Q2 FY22 earnings report, they are still experiencing strong growth. Their Q3 earnings will be reported on 1 Dec, 2021.
Snowflake grew its revenue by 101% compared to a year ago and it is now trading at EV/Revenue next 12 months of 24.3x.
Rounding up…
SaaS stocks have matured and proved to have product-market fit. Some of them may still be in losses but it might be because they are spending more to capture market share as fast as they could. The customer acquisition costs should go down over time and these SaaS companies would turn profitable.
The venture capitalists were early in this game and have already reaped the rewards for the risks they have undertaken. But it is not too late for retail investors as many of these SaaS companies are still growing very fast and have a long runway ahead.
What do you think of SaaS stocks? Do you have a favourite that was not covered in this list? Let me know in the comments below.