Software-as-a-Service (SaaS) stocks can be very lucrative investments. The business model is based on subscriptions, which means that customers pay monthly fees. Since the software often becomes an integral part of the operations of the companies that use it, customers are likely to stick with the vendors they sign up with and grow their business with them over time. Software also has minimal physical production and distribution costs, so these companies can operate with high gross margins.
Three top SaaS stocks that investors should consider today are Shopify (NYSE: SHOP), Procore (NYSE: PCOR), and Twilio (NYSE: TWLO).
This Canadian e-commerce giant offers businesses an online presence. With affordable options for businesses of all sizes, Shopify offers even the most humble of startups an affordable way to reach customers through the internet. It also offers marketing and payment processing tools.
According to eMarketer, the Shopify platform enabled the second-largest share of US e-commerce revenue last year – behind only Amazons, and even in front of large retailers like Walmart or marketplace operators like Ebay.
Though it’s still way behind Amazon in terms of market share, Shopify grew its revenue 46% in the third quarter, while Gross Merchandise Volume (GMV) grew 35% to $ 41.8 billion. The company also has more than $ 7.5 billion in cash on its balance sheet – money that it can use to grow its business.
Shopify has been a notable stock over the past five years, up over 3,500%. Still, management expects its GMV to rise faster than fourth-quarter trading in general. It also has long-term goals of building a fulfillment network and developing a business-to-business platform. With ambitious expansion plans and growth ahead, every growth investor should consider owning Shopify.
Procore’s SaaS offering is aimed at the construction industry. It enables owners, contractors, and subcontractors to connect with each other and gather all information about a project in one place. Construction is one of the last industries to join the SaaS revolution and Procore is leading the way.
Revenue rose a solid 30% to $ 132 million for the third quarter and generated free cash flow of $ 6.5 million. Unlike many SaaS companies, Procore doesn’t focus on expanding as quickly as possible. Instead, customers can find their platform organically. It does this by allowing paying customers to add non-paying users to a project. After these companies see the benefits of managing projects with Procore, they are more likely to join and become paying customers.
Procore is at a much earlier stage in its growth than Shopify; It believes it has acquired 2% of its potential customers and less than half of its current customers subscribe to four or more of its 13 products. Its worldwide expansion continues; For example, Procore will start operations in France and Germany next year.
Autodesk (NASDAQ:ADSK) competes with Procore with its Construction Cloud product. However, Procore expects global construction spending to hit $ 14 trillion in 2025. Therefore, the area of construction management software offers a lot of space for several actors. If it can channel even 5% of its spend through its platform, Procore is a successful investment.
With a lot of growth ahead of us, Procore is a great SaaS stock for the future.
If you’ve texted a company before, chances are they’ve got Twilio to help. It provides application programming interfaces (APIs) so that companies can create communication tools without the need for their own software engineers. It has a usage-based pricing model that makes Twilio more revenue as customers grow.
Twilio is the fastest growing of these three companies, with revenue up 65% in the third quarter over a year earlier. It also has an impressive net growth rate of 131%, meaning existing customers spent 31% more in the quarter than they did in the same period last year. And while some of Twilio’s growth has come from acquisitions, its organic growth rate is still an impressive 38%. Concentration risk is reduced as the top 10 accounts account for only 11% of total sales, up from 14% in the third quarter of last year.
The desire and need of businesses to communicate with customers is only going to increase, and Twilio makes it easy for them to do it. Management is committed to organic growth of 30% or more per year for the next three years, which would increase revenue to over $ 5.5 billion using third-quarter revenue after twelve months.
Twilio is showing no signs of slowing down and investors should be aware of this.
For all three of these stocks, valuation is an issue. While the price-to-sales ratio of Twilio and Procore has been going down lately, Shopify’s has stayed pretty stable. Shopify is also rated higher than the other two as the market believes its ecommerce opportunities are huge. Even at this level, the rating still represents a potential investment risk. However, due to the strong execution and future expectations, everyone deserves a large multiple. Should any of the companies fail, the valuation will drop to reflect sentiment about the future. Exciting growth prospects often come with valuation risks, and it is up to companies to deliver on their long-term promise.
As the world becomes more interconnected, SaaS offerings provide companies with powerful tools to increase their effectiveness and productivity. Smart investors should consider buying all three of these stocks, but they need to be aware of the risks. Holding these stocks seems like a great way to beat the market over the long term.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.