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.
In the scorecard above, Salesforce.com is the only stock with strong figures, denoted by the green color.
In light of that scoring, its inclusion on the Dow Jones Industrial Average is no accident. As it will be discussed next, the SaaS provider has a compelling product that customers need.
There are seven SaaS stocks investors should consider. Listed alphabetically by its ticker, they are:
- Alteryx (NYSE:AYX)
- Salesforce.com (NYSE:CRM)
- CrowdStrike Holdings (NASDAQ:CRWD)
- Fastly (NYSE:FSLY)
- Cloudflare (NYSE:NET)
- Palantir Technologies (NYSE:PLTR)
- Zscaler (NASDAQ:ZS)
Alteryx 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 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 (NYSE: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.
CrowdStrike Holdings (CRWD)
Demand for cybersecurity solutions soared during the lockdown. CrowdStrike 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 (NASDAQ:ZM) and Snowflake (NYSE:SNOW).
CRWD trades at lofty valuations, which are justified. Cautious investors may need to wait for the Nasdaq to correct before this stock falls as well.
After Fastly 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.
Cloudflare 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.
Palantir Technologies (PLTR)
Having already rewarded investors who bought PLTR stock at the IPO for $10, Palantir 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 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 service.”
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.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.