Software as a Service Stocks

List of Software as a Service Stocks

10 min read

Software as a Service stocks are one of the most popular sectors for growth investors. It means a software company is selling its products to customers through a recurring subscription model. So what’s the big deal? SaaS companies are incredibly lucrative as stocks. Over time, these recurring subscription revenues increase as the company adds more clients and products to its portfolio. Remember, the company technically only has to create Software once. However, they can sell it to clients for decades. Sure, there have to be upgrades and enhancements. But most of the programming groundwork is laid down with the program’s first iteration.

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What Are Software as a Service Stocks?

So Software as a Service stocks are publicly traded companies selling this Software. If you like growth stocks, the SaaS industry is definitely for you! This sector holds some of the fastest-growing companies and, therefore, some of the most profitable investments. It’s not all positive for SaaS stocks, though. Since these companies are in hyper-growth mode, the stock can often come with higher than normal volatility.

Much of the stock price already has the future growth potential baked in. If the company has a poor quarter or shows signs of slowing down, the share price can take a substantial hit quickly.

Why Do SaaS Stocks Trade at High Valuations?

The future potential growth is often baked into these stocks. Investors watch for growth rates, CAGRs, or Compound Annual Growth Rates to determine the future trajectory. If the company is adding a large number of clients each quarter, then for now, we can reasonably expect this to continue. Thus, we get some pretty inflated and generous forward-looking multiples. 

Software as a Service stocks are a relatively new sector of companies. Yet many of them have grown exponentially faster than companies in other industries. Why do SaaS Stocks trade at such high valuations and exhibit such rapid growth? Let’s take a look!

1. High Gross Margins

As mentioned earlier, the company only has to create the software once. From there, it can be sold to clients for the next twenty years at very little cost. The product is software. And software is digital. You don’t need warehouses or fulfillment centers to physically store or access the software. Digital products are asset-light and capital-light businesses. This equates to incredibly high gross margins over time, which is why so many of these stocks trade at such high forward-looking valuations. 

2. Churn Rate

This isn’t often mentioned when breaking down companies and analyzing stocks. Churn is essentially turnover for clients. SaaS companies often have a negative churn. This means that more clients are becoming customers than existing customers are leaving. It is a negative churn rate and indicates how essential the software is to clients. Think about enterprise software platforms and how many businesses worldwide rely on them. Microsoft (NASDAQ: MSFT) and its Windows operating system probably have one of the world’s lowest churn rates. 

Large TAM and Growth Rate

The TAM, or Total Addressable Market, is dependent on which market your Software serves. Windows operating systems serve enterprises around the world. As long as there are offices, Windows will always be in demand. Total Addressable Market is also subjective.

What the companies believe to be the market isn’t always accurate. Since most SaaS companies develop Software for computers or smartphones, we can reasonably assume that the total addressable market for any SaaS company is vast. Theoretically, anyone with a computer can be in demand of any software. Keep expectations in check. However, the total addressable market for Software as a Service stock companies is generally large.

Software as a Service Stocks ADBE

Software as a Service Stocks Breakdown

Software as a Service stocks have overtaken the market over the past few years. It’s easy to see why they’re so popular. High growth often leads to high returns. If you’re ok with some risk, SaaS stocks can be extremely rewarding in the long term. Without further ado, here are just a few of our favorite SaaS.

1. Adobe (NASDAQ: ADBE)

Talk about a silent beast of a company. Adobe is quietly a $300 billion company, showing no sign of slowing down. We all know it as a PDF reader, but did you know that Adobe has many other software and cloud platforms it offers clients?

Adobe Creative Cloud is the company’s all-in-one creator app that allows you to pick and choose from different software to craft your own monthly or annual subscription. They estimate the Creative Cloud TAM will reach as high as $41 billion in 2023.

It’s one of the main companies at the forefront of the broader digital transformation of the world. Soon, because of companies like Adobe, paperwork will be mostly eliminated, and everything will be available through your smartphone. 

2. Twilio (NYSE: TWLO)

Twilio is a name you hear often on FinTwit, but do you know what the company does? They build web service APIs or Application Programming Interfaces. What do Twilio APIs do? They provide communication links between smartphones and businesses.

Have you ever been waiting for an Uber or ordered takeout from a restaurant? Chances are your smartphone received an SMS or email saying your order is ready or your Uber is on the way.

Twilio allows businesses to contact customers on their smartphones through text messages, phone calls, and other means. It’s a super simple concept.

However, it’s also been extremely lucrative for the company and its shareholders. Last quarter, Twilio reported $669 million in revenues, good for a 67% year-over-year growth. Numbers like this are why SaaS stocks trade for as much as they do!

3. Shopify (NYSE: SHOP)

One of the darlings of the tech sector, Shopify provides entrepreneurs with the software they need to operate an eCommerce store. Shopify is a $187 billion company now.

If you invested in the stock five years ago, it’s returned 3,444%. Talk about a compounder with out-of-this-world growth. Shopify has global partnerships with massive companies like Facebook, Alibaba, Walmart, and TikTok. The entrepreneur software industry is now a one-horse race because of Shopify.

In 2020, Shopify held an 8.6% share of the U.S. eCommerce market, second only to Amazon at a whopping 39%. Shopify has so many arms now that nobody should be surprised if software sales can lead Shopify to become a $1 trillion company one day. 

4. DocuSign (NASDAQ: DOCU)

Sometimes, all you need to do is do one thing and do it well. That’s a bull argument for DocuSign, which is slowly taking over the eSignature industry. Many investors wrote DocuSign off as a COVID-19 pandemic play.

But the digital transformation of signing documents is here to stay. DocuSign has a whopping 988,000 paying customers and had a 50% year-over-year revenue growth this past year. DocuSign also has an impressive 125% net dollar retention rate. This means returning customers spend 125% more than they did the first time. The digital signature market is fragmented, with Adobe being its largest competitor. DocuSign is only a $57 billion company, so the runway is long for more growth in the future. 

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Hottest Software as a Service Stock

Crowdstrike (NASDAQ: CRWD)

The hottest name in one of the fastest-growing industries. CrowdStrike is emerging as a clear leader in the cybersecurity sector. Its Falcon endpoint threat detection network is cloud-based. They utilize artificial intelligence and machine learning. When a threat hits one of its customers, the platform utilizes the 1/10/60 rule. One minute to detect a threat, ten minutes to analyze it, and sixty minutes to neutralize it. Once a threat is neutralized at one endpoint, all other endpoints in the network gain this data, strengthening the overall ecosystem. Some predict the cybersecurity industry will be worth as much as $350 billion by 2025. Therefore, CrowdStrike is well-positioned with an impressive portfolio of existing clients.

Final Thoughts: Software as a Service Stocks

Buy them, invest in them, and never sell. Those are the general rules regarding software as a service stock. Especially if you can invest in them in the early stage of growth. The stocks we provided are just a handful of the best SaaS stocks on the market. Ones that didn’t cut?

ServiceNow, Zoom, Okta, Zscaler, Cloudflare, Asana, Salesforce.com, Datadog, MongoDB, and Atlassian are just a few. As we continue to rely on software and apps to power the future of digital transformation, more companies and stocks emerge as powerful investments over the long run. SaaS stocks are expensive and overvalued. However, please focus on the future growth potential rather than current sales numbers.

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