Software-as-a-service (SaaS) companies are a win-win for customers and for investors. And analysts love the predictable revenue that comes with SaaS stocks.
I’m old enough to remember when software updates had to be painstakingly and meticulously conducted. It was all very hush, hush. Nobody could really know what the IT people were doing. But for many businesses those days are long gone. But fortunately for investors, there’s an even better opportunity.
You see, companies like Microsoft (NASDAQ:MSFT) used to require you to buy its physical software and then install it on your computer. It wasn’t really good for either side. Now software is in the cloud and updates happen essentially while you sleep. And this has given way to the SaaS sector.
This isn’t new. But some of the stocks in the sector are sure behaving as if they were a startup company. And there’s good reason for that. Analysts love them. SaaS companies are, in industry terms, sticky. Once a business begins to use a company’s services, they generally stick with that company. That means predictable, steady revenue and fewer surprises at earnings season.
However there is a downside: SaaS stocks can get expensive really fast. Look at names like Twilio (NYSE:TWLO) or The Trade Desk (NASDAQ:TTD). But even with that obstacle comes some good news. There are many, many companies in this sector. And I’m going to give you seven that you can add to your portfolio or watch list.
- Salesforce.com (NYSE:CRM)
- Shopify (NYSE:SHOP)
- DocuSign (NASDAQ:DOCU)
- Adobe (NASDAQ:ADBE)
- Wix.com (NASDAQ:WIX)
- Bandwidth (NASDAQ:BAND)
- Coupa Software (NASDAQ:COUP)
SaaS Stocks To Buy: Salesforce.com (CRM)
The headling of this piece promised SaaS stocks to buy for consistent returns. So I’m not looking to fool anyone here. Salesforce.com belongs in your portfolio.
One reason to consider the stock is its valuation. As the year began, CRM stock was trading at approximately 10 times its projected fiscal 2021 sales. Many stocks in this sector are priced much higher.
Salesforce operates in the area of big data. The company’s software helps businesses collect real-time customer data, among other things. According to Gartner Research, Salesforce controlled approximately 18% of the global CRM market at the beginning of 2020.
With the company’s pending acquisition of Slack Technologies (NYSE:WORK), it will have another avenue for generating sales. But it will have to show investors exactly how Slack fits in with the company’s core competencies. That has given some investors a reason to move away from Salesforce and into other, smaller growth stocks in the segment. The CRM stock price has fallen about 14% since the deal was announced.
However, if you’re looking for consistency, Salesforce is for you. And you may have an interesting opportunity to buy shares of CRM stock while it’s off of its highs.
Continuing with the obvious theme leads me to Shopify as the next of the SaaS stocks. As I write this, SHOP stock is up more than 250% in the last 10 months. That corresponds to the onset of the mitigation measures that caused the closing of many physical stores.
SHOP stock is as much of a pure play as you can be. It’s never been anything but a subscription-based service. Customers pay a monthly fee to access the platform and access to Canadian firm’s range of tools to build and manage their online stores.
The company was a big winner during the pandemic for three reasons. First, many companies had to quickly create, or update, their e-commerce platforms when brick-and-mortar stores were closed. Second, many individuals have used the pandemic as an opportunity to start their own e-commerce businesses. Third, many of these customers were looking for an option that was not named Amazon (NASDAQ:AMZN).
Like Salesforce, Shopify appears to be a fortress stock that will continue to benefit as the pandemic ends. That’s because of the fundamental shift toward e-commerce that will continue for reasons of convenience, not public health.
One of the biggest pandemic winners was DocuSign. DOCU stock is up over 250% in the last 12 months. And in December, which is the last quarter the company reported earnings, DocuSign posted a year-over-year revenue gain of over 53%.
The reason why I include DocuSign stock on a list of SaaS stocks that should offer consistent returns is that the company’s business model was already gaining traction. The pandemic just accelerated things. DocuSign provides software that enables secure electronic signatures. Many businesses were already using DocuSign prior to the health crisis. However when businesses had no face-to-face alternative, the need for electronic signing became paramount.
And this already existing market is reflected in the DOCU stock price. In 2019, the company’s stock price jumped approximately 85%.
Some investors may be a bit concerned that the thrill is gone from DocuSign, particularly when the stock has a valuation of about 32 times this year’s sales. However while the business world may be returning to normal, this is an area that is likely to remain the same. After all, if electronic signing can be done securely and remotely, than there’s no reason to believe that customers will be clamoring to sign actual paper in person.
A big reason to like ADBE stock is because the underlying company provides three compelling opportunities in the digital space. In December Adobe reported record quarterly and annual (fiscal) revenues.
The company is perhaps best known for its Creative Cloud suite of products that includes designer staples such as Illustrator and Photoshop. Many businesses that needed the company’s services would have already had the software prior to the pandemic. However, the pandemic has launched many workers down the freelance path as part of the gig economy.
And then there’s the self-publishing avenues of YouTube and TikTok. In days gone by, “anyone” could be a writer. Now “anybody” can make a video and for better or worse, Adobe allows them to do that.
But Adobe is far more than its creative tools. It competes with DocuSign in what amounts to a duopoly in the e-signature sector. And it has a customer experience management (CXM) business as well. This is taking the company into the arena of big data that includes Adobe Analytics. It’s one of the most compelling segments of the market. This segment of the business only grew about 5% on a year-over-year basis. That represents an opportunity, but also a risk if the company cannot continue to bring customers on board.
To this point, we’ve been looking at SaaS stocks largely from the perspective of an established business. But what about the individual whose newly formed business needs a professional website? That’s where Wix.com comes in.
It’s similar to Shopify if you are looking to create an online store. But Wix gives customers the flexibility to do so much more than that. And it has a very manageable monthly fee.
WIX stock has been range-bound since last summer, but the company has continued to increase revenue. That growth is expected to be at 26% in each of the next two years.
With that said, Wix remains a smaller company with a market cap of around $13.9 billion as of this writing. That means investing in Wix entails some risk. The company is not yet profitable but is showing signs of delivering strong free cash flow (FCF).
Bet on WIX stock if you believe that Wix has a business model that will continue to grow as our economy exits the pandemic.
Even smaller than Wix.com, with a market cap right around $4 billion, is Bandwidth.
Why BAND stock? Well, one problem with SaaS stocks is that they can get expensive quickly. That’s the case with a stock like Zoom Communications (NASDAQ:ZM) that soared in 2020 and has many analysts wondering if it’s topped out.
A savvy investor might look at a stock like Twilio which offers companies like Zoom a platform of real-time communication solutions (voice, messaging, 911 access) in the form of an app. However, Twilio is also looking a bit pricey.
BAND stock is up over 130% itself in the last 12 months and it is beginning to generate significant cash to fund its operations. And like Wix, investors aren’t concerned about the company turning a profit at this point. And you shouldn’t be either.
The last of the SaaS stocks on my list is Coupa Software. This is a company that is in the business of making procurement all kinds of sexy. Essentially Coupa’s platform gives customers the ability to benefit from pre-negotiated discounts. Coupa gets these discounts because of its scale. In this way, a group of small buyers with similar purchase needs can band together to get better prices.
At a 2019 conference, author Malcolm Gladwell noted that procurement departments tend to be an overlooked strength. They are part of what is considered a “weak-link” investment strategy that Gladwell likened to being the difference between a basketball team and a soccer team.
However, procurement departments control how a company spends its money which makes them a critical part of a company’s success. That’s one reason why COUP stock is still a buy despite being up nearly 100% in the last 12 months.
Another reason is that Coupa users become a network in themselves. This means that as more users join, there is more incentive for suppliers to join. Which leads to more customers (rinse, repeat).
The result is more pricing power and further value for Coupa customers.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.