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- 🤝 Insiders: SaaS Industry Stock Picks
“Customers won’t care about any particular technology unless it solves a particular problem in a superior way.” — Peter Thiel
This week we’re diving into the world of business-to-business (B2B) software-as-a-service (SaaS) stocks.
B2B SaaS companies have taken off over the past decade for providing cloud-based products for businesses. And it turns out that focusing on selling businesses, rather than individual consumers, is extremely lucrative.
Investors love B2B SaaS stocks - they provide predictable, recurring revenue streams. Businesses don’t change SaaS providers that frequently - and SaaS providers try and lure companies in with long-term contracts.
And B2B SaaS stocks are very scalable, high-margin, and have strong growth potential.
The SaaS market was valued at a hair under $250 billion in 2022. But it's projected to grow into a $908 billion one by 2030 - a CAGR of almost 19%.
And with the AI arms race taking off, more SaaS providers are going to be pitching ways for their clients to capitalize on the generative AI revolution.
This week, we’re looking at four SaaS stocks we’re keeping our eyes on.
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Top SaaS Stocks
1. Salesforce ($CRM)
Business Overview
Salesforce is one of the OG software companies. Salesforce’s bread and butter is its customer relationship management (CRM) software.
Salesforce was founded in 2001, IPO'd in 2004, and became the first cloud company to reach $1B in revenue in 2009.
CRM software helps businesses keep tabs on their customers. And with the rise of AI and data analytics - Salesforce picked a good niche to go after. In 2022, Salesforce’s global market share on CRM reached 23%.
And their global footprint is huge and growing - they have more than 150k clients in 181 countries.
Catalysts
Salesforce is so profitable, it's practically printing money. $CRM has been growing its free cash flow (FCF) at a high double-digit percentage. And they have double-digit revenue growth to match it, too.
As more companies become data-driven, Salesforce isn’t only selling its proprietary CRM software - it’s selling its clients a competitive advantage.
Now? So many CIOs and business leaders feel they have to adopt some sort of Salesforce strategy to stay a step ahead of competitors (or at least placate investors).
And Salesforce is all-in on the generative AI craze. They've hired 3,300 staffers to help launch its Einstein Copilot.
Einstein will help companies analyze data, and can even take Salesforce's CRM to the next level by creating automatic account updates, sending auto-generated sales emails and replies, and targeting the right audience.
The generative AI craze is exciting - but companies are still wondering how they’ll be able to use AI to add value to their businesses. $CRM’s focus on using AI to drive their clients’ revenue could stick out and become an industry-standard in the generative AI space.
Key Figures $CRM (as of 9/25/2023)
Current Price: $205.59
Wall Street Ratings
Analysts: 37 Buy, 14 Hold, 1 Sell
Median Target Price: $260.00 (26% premium)
Revenue: $33.07B
Market Cap: $200.86B
EV / NTM EBITDA: 23.9x
2. Adobe ($ADBE)
Business Overview
When it’s 11pm and you get a ‘pls see my comments’ email with a PDF attached, it can only mean one thing - and brought to you by Adobe.
Adobe was founded in 1982 in California, And they're taking credit for pioneering the paper-to-digital transformation with the invention of the PDF. And over 40 years after Adobe was founded, people used Adobe Document Cloud to scan, edit, share, and sign documents.
But they're not resting their laurels on past success - they're drumming up investor support by exploring AI capabilities.
Catalysts
Investors love strong, recurring revenue. And Adobe’s figured out how to master it. Back in 2012, when the rest of the tech world was still trying to figure out what a subscription even meant, Adobe was already transitioning from a one-time purchase product model to a subscription-based one.
Fast forward to FY22, and subscriptions are Adobe's bread and butter, accounting for 93% of its total revenue.
Another favorite investor catalyst Adobe checks out? High barriers to entry. They’ve built a fortress of brand recognition so massive and have built a 61.33% market share in the Application Development sector.
Adobe’s customer loyalty is insane - when companies think of industry-standard software, they think of Adobe products. This makes it very difficult for competitors to snatch Adobe’s customers.
And Adobe launched a generative AI model called Firefly last week. Adobe will use AI to help creators, and hopefully help investment bankers turn around comments even faster.
Key Figures $ADBE (as of 9/25/2023)
Current Price: $508.77
Wall Street Ratings
Analysts: 16 Buy, 1 Hold, 1 Sell
Median Target Price: $610.00 (20% premium)
Revenue: $18.9B
Market Cap: $233.8B
EV / NTM EBITDA: 30.7x
3. Workday ($WDAY)
Business Overview
Workday is cloud-based and helps companies manage their HR, payroll, and financial data.
If your company uses Workday, you’re probably logging into the website at least once a week to get your paystubs, track time, and even set goals or request feedback from your managers.
As more businesses move their HR and payroll operations to the cloud, Workday has experienced steady growth due to the increasing demand. And as of 2023, Workday says more than half of the Fortune 500 are clients.
Catalysts
More and more companies are migrating to the cloud - and Workday is poised to rake in some serious growth as the trend continues.
Workday's revenue growth rates hover between 17-22% over the next several quarters. The company is financially starting to grow stably and predictably, which allows management to work on maximizing efficiencies and focus on increasing profitability.
$WDAY is on track to achieve GAAP profitability soon. They also have a growing subscription backlog - which means the company has a strong pipeline of future business.
Workday says they've focused on growing long-term contracts during 2023, which could indicate strong customer engagement.
Key Figures $WDAY (as of 9/25/2023)
Current Price: $230.70
Wall Street Ratings
Analysts: 27 Buy, 10 Hold, 1 Sell
Median Target Price: $260.00 (13% premium)
Revenue: $6.7B
Market Cap: $60.5B
EV / NTM EBITDA: 133.5x
4. Snowfake ($SNOW)
Business Overview
Snowflake is a data cloud company that, launched in October 2014, has become one of the largest players in the data-as-a-service industry.
In today’s day and age, companies have more data than they know how to make sense of. From customer info, sales numbers, inventory data - you name it.
Most companies don't have the time or the resources to set up their own data infrastructure - so they turn to data-as-a-service providers like Snowflake.
Snowflake is sitting on a goldmine of data, and they're helping other businesses tap into it.
With the rise of artificial intelligence and machine learning, having a solid data strategy is like having a cheat code in the game of business, and Snowflake is the dealer.
Businesses are migrating their data to Snowflake's cloud, and that's a cash cow waiting to be milked.
Catalysts
Snowflake wants to bring the power of generative AI to data. And they’re pivoting to become more of an AI/machine company. They’re already bringing in $2.5 billion in revenue annually.
Data-as-a-service is all about insights and trends, and AI can help Snowflake bring it to the next level.
Snowflake's AI and machine learning can crunch the numbers to help companies figure out which products are flying off the shelves and predict trends.
Snowflake recently acquired three companies that can help bring generative AI to the data cloud. The first, Neeva, leverages AI to help users search for data. The second, Steamlit, helps build generative AI apps. And the third, Applica, uses deep learning to sort information.
Snowflake isn’t building its customer base from scratch - they’re already a multi-billion in revenue company. But AI is going to help the company take its insights to the next level.
Key Figures $SNOW (as of 9/25/2023)
Current Price: $149.99
Wall Street Ratings
Analysts: 30 Buy, 13 Hold, 1 Sell
Median Target Price: $195.00 (30% premium)
Revenue: $2.4B
Market Cap: $49.3B
5. ETF - The Global First Trust Cloud Computing ETF ($SKYY)
Business Overview
$SKYY is perfect for investors who want exposure to SaaS stocks, but also like having cloud computing and other technology providers in their portfolio.
$SKYY’s holdings are some of the top B2B providers out there, and it’s a diversified portfolio enough to provide exposure to a broad array of industries.
Key Figures
Inception Date: 4/12/2011
Expense Ratio: 0.68%
AUM (Net Assets): $529.94M
1-Year Return: +25.9% (compared to S&P 500 +18.5%)
Return Since Inception: +269.1% (compared to S&P 500 +249.6%)
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