Software as a service stocks, better known as SaaS stocks, represent companies that host applications on the web that customers use as services. There are lots of great SaaS companies out there today, and a lot of them worth investing in.
Some SaaS apps are simply going to be more suited to desktop use. For example, users are much more likely to sift through spreadsheet data on a desktop than on a mobile device.
But we live in a hyperconnected, on the go world. That means sometimes you need access to files and functionality on the go. And that’s where these stocks come in.
Here are 7 SaaS stocks to buy today for the smartphone generation:
- DocuSign (NASDAQ:DOCU)
- Google (NASDAQ:GOOG,GOOGL)
- Slack (NYSE:WORK)
- Zoom Video (NASDAQ:ZM)
- Shopify (NYSE:SHOP)
- Dropbox (NASDAQ:DBX)
- Microsoft (NASDAQ:MSFT)
We consumers are using our smartphones more than ever which is a trend that shows little sign of slowing. That’s why these SaaS stocks make so much sense in a smartphone generation.
SaaS Stocks to Buy: DocuSign (DOCU)
DocuSign has done very well over the past year. This time in 2020, DOCU stock sat at under $80 per share. Today, it’s currently at $230. This is clearly among the strongest SaaS stocks of late.
A good portion of that success is reflected in its growth in billings and revenue. DocuSign recorded a 63% increase in billings from Q3 2019 to Q3 2020. In the same period revenues rose by 53%. For the purposes of this article, it’s also interesting to note that web and mobile revenue accounted for 13% of total revenue during both periods.
So what is DocuSign’s utility as it pertains to mobile? Well, the company has 822,000 global users, many of whom are signing documents and conducting business on the move. Agreements are the foundation of the legal ability to conduct business and being able to sign them from the convenience of a smartphone simply increases efficiency allowing more business to get done.
Wall Street appreciates DocuSign stock already, but the smartphone generation should drive growth in the stock as well as in mobile use to push DOCU even higher.
I believe Google is simply one of the best companies on the market today. The company is so vast, and its strategy between its so-called Alpha Bets and Other Bets makes it a strong contender to remain relevant for a long, long time.
Google Cloud is perhaps the best example of SaaS within the company and makes it an SaaS stock for the smartphone generation. I know I use Youtube for entertainment wherever I am. Again, personally speaking, I also use Google Drive to accomplish lots of work, both in a desktop format and via mobile. Most importantly, I am not alone in this.
On February 2 we’ll find out just how well the company has done. But even without the benefit of Q4 earnings there is little doubting the company’s strength. In Q3 Google recorded $46.17 billion in revenues, $16.40 of EPS, and over $11 billion in net income. Google search accounted for $26.34 billion in revenue and Youtube more than $5 billion in Q3.
Both of these owe a significant amount of their success to the mobile viewer. Google’s products and services are intertwined with the smartphone user and this is simply one of the most representative stocks for this generation.
Google simply creates value as evidenced by its WACC vs. ROIC of 7.06% compared to 21.29%. Broad metrics like it tell a story of a company that just makes sense.
Slack is a great SaaS company as applied to the mobile generation and work. Workers are tired of physically gathering together to discuss projects in meetings. Businesses lose a lot of money due to the inefficiency associated with the process. Slack solves some of that with project software, communication channels, idea sharing spaces and more. Slack lessens the inefficiency created by working together, which is a powerful draw for companies.
In terms of WORK stock currently being worth the buy, there’s two schools of thought. One is that Slack received an unnatural usage spike due to the pandemic. Employees have been working from home giving Slack an unprecedented bump. This won’t last forever, even as remote work catches on, because many employees will return to non-remote work. Therefore Slack will encounter an inevitable slide to some degree. This seems to be the prevailing train of thought from the Wall Street coverage of the stock.
This is despite Slack revenue growing by 39% YoY in the latest earnings report. The company also increased profit by roughly 33% by GAAP and Non-GAAP measurements and made bounds toward slashing operating losses. To my mind, now is a time to buy as growth in enterprise adoption should occur as Slack proves its utility.
Zoom Video (ZM)
Zoom Video is an SaaS stock with applicability to consumers across not just business but also everyday life. Zoom is useful for meetings as well as webinars and many other sales applications. People utilize it to meet with family and it has become widely adopted for educational purposes during the pandemic. Zoom is perfect for the on-the-go mobile generation as it can be used anywhere.
The company announced it had reached 1 million Zoom Phone subscribers on January 12. According to Elka Popova, VP of Connected Work Research at Frost & Sullivan, Zoom Phone usage has grown quickly, “thanks to its innovative pricing model and widespread availability in 44 countries and territories, it has quickly become an attractive option for many SMB and enterprise customers around the world.”
Zoom faces the same problem that Slack does. The happy problem of a usage spike due to the pandemic. Zoom states in its most recent 10-Q “we faced unprecedented usage of our video-first communications platform largely due to the COVID-19 pandemic. We expect our user growth rate to slow or decline once the impact of the COVID-19 pandemic tapers, particularly as a vaccine becomes widely available, and users return to work or school or are otherwise no longer subject to shelter-in-place mandates.”
The bump was reflected in performance through the first 9 months of 2020. Zoom skyrocketed from $434 million in revenue during the 2019 period, rising to $1.77 billion in 2020. But for investors who believe this put a good company on an accelerated growth path, Zoom makes a lot of sense.
Shopify makes sense for a few reasons. The company has recorded EPS earnings beats in each of the last 4 quarters. Plus, accelerated by the pandemic, ecommerce is only growing in adoption.
According to DigitalCommerce360 “Ecommerce accelerated two years. If it weren’t for the boost from the pandemic, the nearly $840 billion in online retail sales in 2020 wouldn’t have been reached until 2022.” This has been a boon to Shopify as the smartphone generation migrates toward handheld ecommerce.
This boost leads to trepidation on the behalf of Wall Street. Analysts recognize that ecommerce is booming and Shopify is a beneficiary. Yet more than half of the analysts covering SHOP stock consider it a hold. But these same analysts also give it a target price that indicates upside from current prices. That’s contradictory, but seems generally positive for investors.
Q3 2020 revenues grew by 96% to $767.4 million YoY. Shopify is the leading ecommerce alternative to Amazon. Shopify mobile makes it pretty seamless to run a business from a smartphone. Even when the pandemic finally ends, that truth is still going to exist.
Investors will have to wait until February 18 for Dropbox to release its most recent earnings. However, if they’re anything like last quarter’s, there’s good reason to get on board. The company saw revenues rise by 14% to $487.4 million, it saw paying users rise from 14 million to 15.25 million and margins reach 80%. Dropbox is clearly useful for the mobile generation as we share more of our work from our phones.
DBX stock makes sense not only for that reason, but also because it looks to be a great value stock. Average analyst targets put DBX shares at nearly $28, rising to a high of $37.
Current share prices are around $22. The company also has strong free cash flows which allow it room to operate in ways cash strapped businesses cannot.
Microsoft continues its strong run. Its most recent earnings release shows that the company just keeps improving:
- Revenue was $43.1 billion and increased 17%
- Operating income was $17.9 billion and increased 29%
- Net income was $15.5 billion and increased 33%
- Diluted earnings per share was $2.03 and increased 34%
The core business is strong and the stock is attractive as Microsoft returned $10 billion to shareholders through dividends and stock buybacks in Q2. That was an increase of 18% over the prior year.
Cloud, which is especially pertinent to the smartphone generation, was strong with cloud services revenue rising 26%. Azure revenue meanwhile, rose 50%.
Some may argue that MSFT shares are overpriced. I would disagree given that their P/E ratio is only slightly lower than half of peers. But I think the company simply shines in terms of its profitability with an ROE and margins within the top 5% of the industry. It remains among the very best SaaS companies.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.