After an incredibly tumultuous year, Software-as-a-Service (SaaS) stocks continue to power the interconnected world. SaaS is a fancy way of describing how customers access software application solutions over the Internet. To the provider, the licensing and distribution model is typically a subscription. This lowers the start-up costs for customers in the early phase of implementing software solutions in their business.
Corporate customers need SaaS more than ever. Remote working accelerated the adoption of software over the cloud. For example, email, customer relationship management, cybersecurity tools, and instant messaging are some of the tools that businesses found a sudden demand in.
There are seven SaaS stocks investors should consider. Listed alphabetically by its ticker, they are:
CrowdStrike Holdings (CRWD)
Palantir Technologies (PLTR)
Alteryx (AYX) is trading at a discount because
management issued conservative guidance in
the last earnings report. At a technology, media,
and telecom conference, Chief Financial Officer
Kevin Rubin said customers are moving to the
cloud and SaaS. The transformation is only
starting. Its clients will need, for example,
a virtual private cloud. Also, clients will rollout
to thousands of related offerings to staff lifting
Alteryx’s revenue and profit margins.
Alteryx’s server product is an upcoming catalyst for its growth. It enables clients to collaborate, while automation and governance are deployable on the cloud. The more data clients put on Alteryx’s solution, the bigger the returns from this SaaS offering.
AYX stock will rise steadily as more customers deploy its product. Simplifying the deployment process of the cloud product is a critical first step. From there, Alteryx will support customers closely to ensure they are getting the most out of the platform.
On Wall Street, the average price target is around $142, according to Tipranks.
With a $276 average price target on Tipranks,
Salesforce.com (CRM) is a favorite pick.
Early adopters of Salesforce turned out to get
a competitive advantage. As it acts as a
co-owner in the digital transformation,
CRM helps customers deliver
better service quality. For example, the
company cited an oil and gas company in
Texas struggling with field services.
The firm had thousands of different wells and operations. Salesforce helped it service them effectively through cloud-based solutions.
CRM is a positive driver of salesforce effectiveness for customers. It has customers like Humana (HUM) who need data analytics and visualization.
CRM’s acquisition of MuleSoft a few years ago will bear fruit too. The unit helps customers in digital transformation by connecting all of their business systems. Integrating customer data in a single location reduces the complexity. This ultimately drives efficiencies and lowers costs.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
(LITE) manufactures optical
and photonic products that
are used by optical net-
working and commercial
customers. One of the
lights in the sector, Lumentum, benefits from able management, and strong fundamentals. Its recent quarterly results confirmed that the business remains novel coronavirus proof, despite supply chain issues arising due to
Revenue came in at $368.1 million, beating consensus estimates by $18 million. Net income is positive for the quarter and trailing nine months. Shares gained 5% pre-market after the Q4 beats on EPS and margins. However, supply chain issues buffeted the company during the quarter. But that’s an expected issue since we are in the middle of a pandemic. Many countries implemented restrictions on the free movement of goods. That affected Lumentum’s logistics, especially in countries like Malaysia.
With all that said, let’s discuss valuation a bit before wrapping up. With LITE stock trading at 53.14x trailing 12 months price to earnings, shares are hardly available at a discount. It’s arguable that the stock is in the overbought category. That’s not to say I am not bullish on its future. It’s just that I would wait for shares to drop 10% to 15% before buying in.
Workday (WDAY) stock is
interesting for two reasons.
First, the business model is
Workday’s HCM (human
capital management) platform
is of great value to large enterprises in particular. And it provides a base for steady expansion over time.
The second reason the stock looks attractive is relatively muted performance of late. WDAY stock actually is down over the past year, if by just 0.3%. According to a screen on finviz.com, there are 55 software stocks with a market capitalization over $10 billion. Only four, like WDAY, are negative over the past 12 months, and one of those is pandemic victim Uber (UBER).
To be sure, it’s possible concerns around the model explain that poor performance. Competition likely is one of those concerns. But it’s equally likely that WDAY stock will catch up to the myriad other names that have been among the most popular software stocks to buy. Earnings this week proves the point, as the company beat estimates for the second quarter.
Outside of Microsoft, perhaps
no large company has better
managed the transition to SaaS
than Adobe (ADBE). Its
Photoshop and Illustrator,
among other platforms,
traditionally were disk-based options.
They are now part of bundles, including Adobe Creative Cloud, that have driven impressive and consistent growth in recent years.
As with CRM, valuation admittedly is a concern. ADBE stock historically didn’t look that expensive, often trading at 30x forward earnings or less. It’s now as 43x.
But with MSFT itself clearing 30x, and CRM over 50x, that multiple on its face isn’t outrageous. And with Adobe’s growth likely to include e-signatures as well, there’s plenty of runway for the company to grow into the steep valuation assigned its stock.
Demand for cybersecurity solutions soared
during the lockdown. CrowdStrike (CRWD)
met those needs by protecting systems,
whether they are online or not. CrowdStrike
Falcon has a lightweight sensor that protects
the endpoint. This technology includes
machine learning, which protects the client
from known risks and zero-day malware.
CrowdStrike has a moat over other cybersecurity firms because of the product’s behavior artificial intelligence heuristic algorithms. CRWD calls these “Indicators of Attack.” Investors unfamiliar with Indicators of Compromise (IOC) and Indicators of Attack may read this white paper.
In an investor presentation, the firm highlighted its annual recurring revenue reaching a milestone of $1 billion. Getting to over $3 billion in ARR will require expanding its addressable market, capturing secular trends, gaining market share, and innovating. Its subscription revenue is now only behind rival giants such as Zoom Video Communications (ZM) and Snowflake (SNOW).
CRWD trades at lofty valuations, which are justified. Cautious investors may need to wait for the Nasdaq (.NDX) to correct before this stock falls as well.
Cloudflare (NET) is well off its February 2021
high after posting strong quarterly results but
issuing soft guidance.
In the fourth quarter, Cloudflare posted
revenue rising 50% year-on-year to $125.9
million. Still, it lost 2 cents a share. For the
current quarter, the firm forecasted revenue
of $130-$131 million in revenue. This is higher
than consensus but the loss per share of 2 cents
to 3 cents is a disappointment.
Higher bandwidth requirements will give NET stock a lift in the longer term. Data that moves between clouds or SaaS applications will cost customers money. Cloudflare moves the data as efficiently as possible, saving customers money. It also connects to all the major public cloud providers on a private network interface. CEO Matthew Prince said last quarter that those cloud providers do not pay to send Cloudflare the bandwidth. As a result, everyone saves money. Plus, Cloudflare offers security and control. Those are two key characteristics that IT departments want with SaaS.
(On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.)
After Fastly (FSLY) posted fourth-quarter results
in February, the stock dipped because the
company did not issue a strong outlook.
Furthermore, its revenue guidance of $83
million to $86 million is underwhelming.
FSLY stock is under pressure as it expects
a net loss of as much as 13 cents a share.
For the full year 2021, it may lose as much
as 46 cents a share. With losses ahead,
why is Fastly a compelling SaaS?
CEO Joshua Bixby expects the digital transformation will continue, spurred by the pandemic. As the world moves into a multi-cloud environment, businesses will need to centralize delivery among data centers. To increase its pricing leverage from the biggest cloud providers, customers will need Fastly.
Appliances on Fastly’s platform benefit from a centralized cloud that saves them money.
In the fourth quarter, Fastly posted strong dollar-based net expansion rates of 143%. Its net retention rate topped 115%. Customer breadth is widening. The company has gaming, education, and financial service firms that need Fastly’s platform. Telecommunications and media are also among the customer list. Increasing demand for news in real-time drove Fastly’s revenue in this segment.
Having already rewarded investors who
bought PLTR stock at the IPO for $10,
Palantir (PLTR) continues to win customers.
On March 11, Palantir and Faurecia announced
a long-term strategic partnership.
The six-year deal will accelerate Faurecia’s
digital transformation and ambition to be
carbon dioxide neutral.
On its website, Palantir advertises Palantir
Apollo in powering SaaS “in places no SaaS has gone before.” It counts on customers that require the SaaS on the back of a Humvee or the hull of a submarine. Apollo has an edge over other providers because of the continuous software delivery powering its platform. Foundry and Gotham also enjoy uninterrupted software delivery. Customers do not need to choose between stability and the speed of getting updates delivering without disrupting operations.
PLTR stock is range-bound since the Nov. 2020 rally. The post-initial public offering insider lockup expiry is pressuring shares. Strong buying interest counters this headwind.
Zscaler (ZS) offers security as a service
(SECaaS). It delivers security technologies
as a cloud service. Simply put, SECaaS is,
“a way to deliver security technologies—which
are traditionally found in enterprise data
centers or regional gateways—as a cloud
Zscaler has partnerships with vendors like
Microsoft Azure and Okta. It also integrates with endpoint vendors like Crowdstrike. Customers benefit from avoiding the need for hundreds of software vendors. Also, it has the best-of-breed platforms to count on.
In its last quarter, the company posted revenue growing 55% Y/Y to $157 million. It earned 10 cents a share. It also reported strong billings and deferred revenue growth.
The majority of analysts rate ZS stock as a buy with an average price target of $236.75. After rising steadily in the last year, the stock will likely get to the price target before the year is up.