About six weeks into 2021 and it was a robust period of performance for high-growth stocks. SaaS stocks, in particular, did pretty well. Many of these names generated gains that are normally measured in quarters or years, but instead generated that type of performance in less than two months.
For many investors, that was a profit-taking opportunity — like InvestorPlace’s Louis Navellier and Matthew McCall did with their 2021 Power Portfolio. Unfortunately, most investors didn’t lock in their gains.
In the latter weeks of the period and going into the second quarter, it hasn’t been such a smooth ride. While some of these names are holding better than others, a vast majority of high-growth tech stocks have taken a beating.
If investors were able to sidestep some of that pain — or better yet, rode these names higher and took profit — the recent dip is likely an opportunity to get long again.
Investing in growth stocks is no easy task thanks to this volatility. However, there’s no denying that SaaS stocks are ones we want to have on our radar. The growth and quality of these businesses are simply too hard to ignore.
With that in mind, let’s look at a handful of SaaS stocks we want to own:
- Adobe (NASDAQ:ADBE)
- salesforce.com (NYSE:CRM)
- The Trade Desk (NASDAQ:TTD)
- Snowflake (NYSE:SNOW)
- Twilio (NYSE:TWLO)
- Shopify (NYSE:SHOP)
- DocuSign (NASDAQ:DOCU)
SaaS Stocks to Buy: Adobe (ADBE)
Large- and mega-cap tech stocks surged off the March 2020 low. Many of these names — FAANG included — rallied hard into September and topped out. Since then, these stocks have been trading in a sideways consolidation, including Adobe.
Despite strong demand for its products and impressive earnings, investors just can’t seem to muster up the strength to rally ADBE stock. However, not all hope is lost. An old saying on Wall Street is that, “corrections take place through price or through time, and the latter is much less painful.”
With Adobe and many of its peers, that’s exactly what we’re seeing right now. I’d much rather sit through a boring stretch of sideways trading than stay up at night worried about the huge losses in the stock.
Even better, we have a very recent earnings report with Adobe.
On March 23, the company reported better-than-expected earnings and revenue and raised its full-year revenue and earnings outlook.
The stock’s reaction? A selloff — although the stock has since rallied back to its pre-earnings levels. I don’t know how long the market will dislike SaaS and other tech stocks. But clearly these businesses have momentum and the stocks will eventually reflect that.
Salesforce is a lot like Adobe. The stock enjoyed a strong rally through the summer, ultimately gapping higher in late August on robust earnings. However, shares topped out with the rest of tech a few days later and have been unable to gain much upside traction since.
In fact, CRM stock remains more than 23% below its all-time high and at its recent low, shares were down close to 30%.
Also like Adobe, salesforce delivered an impressive earnings result. On Feb. 25, the company beat on earnings and revenue expectations, while delivering upside top- and bottom-line guidance for Q1 and Q2.
Yet despite these results, Wall Street pushed the stock lower. It’s simple: Many SaaS and high-growth tech stocks are out of favor. But that’s exactly what long-term investors want to see, because that’s their opportunity to accumulate these names.
Why is it an opportunity? Because the growth remains strong with these companies. Analysts expect salesforce to grow revenue 21% this year and 19% next year. For all we know, perhaps those estimates are too conservative, particularly after salesforce’s acquisition of Slack (NYSE:WORK).
The Trade Desk (TTD)
The Trade Desk was a massive winner in 2020. Shares traded all the way down to $140, but once the Street realized how powerful this company really was, they bid the shares up without hesitation. Ultimately TTD stock topped out at just under $1,000, at $972.80.
Amid the current correction, investors had an opportunity to buy this name about 40% off those highs. While some investors may be running for the hills amid such a decline, keep things in perspective too: Shares rallied over 600% from the lows in less than a year.
So while correction can feel painful, we also have to realize just how far SaaS stocks can run when momentum is working in their favor.
The main concern with The Trade Desk is valuation, which before the correction was getting pretty elevated. However, there is not much concern over its product or its growth.
The company’s advertising business only continues to swell. Analysts expect The Trade Desk’s first year of $1 billion in revenue, with estimates calling for 35% growth this year. That’s followed by estimates of 30% growth in 2022.
Of course, it helps that The Trade Desk is profitable, as well. This is certainly a name for growth investors to have on their radar.
Snowflake made quite the splash when it went public in September 2020. Its IPO price kept getting driven higher, then Salesforce and Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) bought notable positions ahead of the company’s public debut.
All of these catalysts combined to drive this stock into the stratosphere… like trading at 100 times sales, stratosphere. While Snowflake is an incredible company with excellent growth, the valuation gave scarred investors flashbacks to the dot-com bust two decades ago.
However, with SNOW stock’s 52% peak-to-trough decline, those concerns have eased somewhat. Analysts predict 85% revenue growth this year, 65% growth next year and 57.5% growth in 2023. That leaves Snowflake trading at 29x next year’s revenue. While still high, it’s at least back in the lower atmosphere given its growth rate.
As it continues to dominate in the field of big data, we can expect Snowflake’s top line to continue expanding. This is an impressive business with solid growth, even if most investors hadn’t heard of it until recently.
What a story Twilio has become over the years. The stock debuted near $24 a share in late 2016 and nearly tripled at its high a few months later. But then TWLO stock collapsed back into the $20s and stayed there for several quarters.
Now trading near $350 after a recent 52-week high of $457 and the company has put together an incredible run.
Simply put, Twilio is changing the way companies interact and communicate with their customers. Given how much competition is out there today — be it in streaming, ride-sharing, etc. — communication is more important than ever. Twilio’s acquisition of SendGrid launched the company into the email side of the communication world, opening an entirely new market.
The novel coronavirus helped expand Twilio’s growth to unbelievable levels, hence the stock’s monstrous performance over the past year. However, analysts still expect steady revenue growth. Estimates call for almost 40% growth this year and 31% growth next year. That’s pretty impressive when you consider the acceleration that Twilio and many other SaaS stocks experienced in 2020.
With these stocks building on 2020’s momentum, it shows just how powerful these business models are.
Like The Trade Desk, we’ve seen an explosive move in Shopify over the last 12 months. As with almost all high-growth tech names, Shopify was pummeled in the March 2020 selloff.
Amid its rebound, the company provided an update to investors in April that stymied the rally. In its disconnected state, it’s as if the market didn’t know how to react to the company’s news. After a few days of selling, the bulls took action and launched SHOP stock higher.
Again like The Trade Desk, we’ve seen Shopify accumulate a stretched valuation as a result of its run. However, it’s clear this company is changing the e-commerce landscape. While it won’t dethrone Amazon (NASDAQ:AMZN) and render it worthless, it’s shifting the way brands — both big and small — approach the online marketplace.
As a result, with or without a high valuation, Shopify is here to stay. That’s left bulls wanting to buy the dip, particularly with analysts looking for revenue growth of 40% this year and 30% next year, respectively.
Further, it helps that Shopify is driving positive cash flow and earnings, allowing it to reinvest in its business and expand its product offerings — which sounds a whole lot like what Amazon did years ago.
DocuSign hasn’t been an easy holding lately. Shares are down 29% from the September high and at one point, were down 36%. However, this is a long-term name to consider owning.
DocuSign became popular during Covid-19 out of necessity. While the pandemic put a lot of things on hold, it couldn’t stop the business world from moving forward. People still wanted to buy homes and companies still needed to conduct business. However, the pandemic changed how these things were done. We were now video conferencing for our meetings and signing documents and agreements with platforms like DocuSign.
The company makes doing business cheaper, easier and more convenient. So I must ask, when the pandemic is over, do you think people will go back to the previous arrangement, which is more expensive, more difficult and less convenient?
As a result, DocuSign is here to stay. After more than seven months of a consolidating DOCU stock price, investors have an opportunity to take a closer look at this one.
On the date of publication, Bret Kenwell held a long position in TTD and TWLO.