The Software-as-a-Service (SaaS) business model has become the norm for many software companies. Customers who subscribe to continuously updated software products benefit from the latest technology and increased pricing flexibility, allowing software businesses to earn attractive recurring revenue. The SaaS trend is a key driver of growth in the technology industry.
Image source: Motley Fool
SaaS stocks are popular among investors, and their popularity has been accelerated by the coronavirus pandemic, which has led to high valuations for SaaS stocks. But even if a company is doing well, buying at a high price can dampen returns for investors.
Best SaaS Stocks of 2024
Best SaaS Stocks of 2024
If you want to invest in a SaaS company with a reasonable value, consider these three options.
1.Microsoft
1.Microsoft
For 45 years, microsoft (MSFT -0.17%) has dominated the traditional software market. Microsoft Windows is the standard operating system for PCs, and Microsoft Office remains the productivity suite of choice.
Microsoft’s dominance was tested by the proliferation of mobile devices that did not use Windows and by competition from other companies. alphabetMr. Miss(google 0.21%) (Google 0.04%) Google in the form of Google Docs, Sheets, and Slides. Microsoft eventually abandoned its PC-centric strategy by bringing top-of-the-line versions of its Office applications to mobile devices and launched Office 365, a subscription-based version of Office.
Office 365 has around 52 million consumer subscriptions, and Microsoft maintains its leadership in the productivity software market. His other SaaS products at Microsoft include Teams, the company’s collaboration software that rapidly gained subscribers during the pandemic. Teams aims to be a one-stop shop for collaboration by offering group chat, video conferencing, and many other features.
Microsoft is not a pure-play SaaS company, and its stock price has historically been expensive relative to its earnings. However, the company successfully transitioned to selling subscription-based software while maintaining its market dominance. Both revenue and revenue are increasing rapidly, even as demand for his SaaS services has changed as the pandemic subsides.
2. Adobe
2. Adobe
It is best known for its creative software such as Photoshop. adobe (adobe 0.04%) setting industry standards. Adobe’s alternatives are cheaper and some are free, but that hasn’t been enough to shake up the software giant’s market leadership.
Adobe is committed to subscriptions, announcing in 2013 that it would stop developing new versions of its standalone creative software and switch to selling subscription products. The move paid off in a big way, with Adobe’s 2020 revenue increasing from just $4 billion in 2013 to nearly $13 billion. The move from selling one-time licenses for hundreds of dollars to selling subscriptions for as little as $10 has made the company’s software available to more users.
Like Microsoft, Adobe stock is historically expensive. However, the company fared well even during the pandemic, posting record revenues and profits, and its strong growth continued into 2021. Third-quarter revenue soared 22% and earnings per share jumped 28%, and the company expects similar growth at the end of the year. Adobe is as dominant as ever, and that’s unlikely to change.
3. Salesforce
3. Salesforce
sales force (CRM -0.07%) is a cloud-based customer relationship management software provider and SaaS pioneer. The company went public in his 2004, and its annual sales increased to approximately $17 billion in fiscal year 2020. According to the paper, sales are expected to reach nearly $32 billion in 2023 due to continued growth in core businesses, as well as the impact of large acquisitions such as Slack. Company guidance.
Salesforce isn’t as profitable as Microsoft or Adobe, in part because it spends nearly half of its revenue on customer acquisition to keep growing. Salesforce stock has soared nearly 800% over the past decade as the SaaS business model has become the industry standard.
The pandemic wasn’t a big problem for Salesforce, and the company posted double-digit revenue growth throughout 2020. Salesforce’s resilience during the crisis makes it a good option for investors looking for a pure SaaS stock.
Did you know that?
Fast-growing SaaS companies often incur significant losses as they grow revenue.
How to choose SaaS stocks
How to choose SaaS stocks
Many investors use the price-to-earnings ratio (P/E) to value companies, but this type of analysis is not always possible as many SaaS companies are not yet profitable. . Instead, you can consider her two important indicators:
customer acquisition cost
How much does your SaaS company spend acquiring each new customer? You can calculate the ratio of sales and marketing spend to revenue and assess whether that ratio is decreasing over time. If not, your company may be growing but still spending too much to acquire new customers.
Price to sales ratio
The price-to-sales (P/S) ratio, which is a company’s market capitalization divided by its annual revenue, is often used as a valuation metric for SaaS companies in place of the P/E ratio. A high P/S ratio indicates optimism among investors that attractive earnings growth will continue and that earnings will eventually turn into profits.
However, regardless of a company’s quality or growth prospects, very high P/S multiples should be considered carefully.SaaS high flyers such as Shopify (shop -1.84%), zoom (ZM -1.88%), and data dog (DDOG 0.07%) trades at 23 to 65 times sales, but there needs to be enough optimism to justify this ratio. For reference, Adobe’s sales are around 20x, while Microsoft’s P/S ratio is around 13x.
Related investment topics
Don’t ignore your SaaS company’s reputation
Microsoft, Adobe, and Salesforce aren’t the most exciting SaaS stocks, but they’re all profitable and boast valuations that don’t require much mental gymnastics to justify. The growth of subscription-based software accelerated by the pandemic will create many winners in the SaaS industry, but ignoring valuations will result in disappointing returns.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Timothy Green has no position in any stocks mentioned. The Motley Fool has positions in and recommends Adobe, Alphabet, Datadog, Microsoft, Salesforce, Shopify, and Zoom Video Communications. The Motley Fool recommends the following options: His long January 2026 $395 call on Microsoft and his short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
Source link
