3 software stocks for SaaS growth as subscription models fuel cash flow

These software stocks are employing the SaaS approach with massive success and will continue to grow handsomely in the future.

  • By Muslim Farooque,
  • InvestorPlace
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SaaS stocks, or Software-as-a-Service, have become one of the best investments in the stock market. Software companies have transitioned from their old business model of pricey, one-off purchases to a subscription model that provides sustained income.

The new system allows users to use the software according to their requirements, which is always up-to-date. Moreover, users can also spread the cost of using the software, and the software companies get a recurring income stream. This make software stocks with a SaaS model highly attractive, especially during an economic downturn like the one we are facing today.

In many ways, the novel coronavirus-led market slowdown is the first real test for SaaS companies. Most SaaS companies achieved significant scale after the financial crisis in 2008. So far, these companies have passed the test with flying colors, posting record revenues that are on track to by 12% annually, hitting $105 billion this year.

It’s clear that in the future, SaaS companies will dominate the enterprise software market. It will form 80% of the enterprise software market by 2030, up 55% from its current share.

Let’s now look at some of the best performing software stocks in the market:

Adobe

Adobe (ADBE) is a multinational software company offering multimedia, creativity and digital marketing software for its users. Since transitioning to the SaaS model back in 2013, the ADBE stock price has increased over 1,300%.

The model provides greater certainty of revenue streams, something which had eluded the company in the 2000’s. Hence, healthy revenue growth, robust cash generation, and low debt make Adobe stock a highly attractive investment.

It recently reported third-quarter results, where revenue increased 14% year-over-year to $3.23 billion. Its digital media, creative cloud, and document cloud segments all witnessed double-digit growth during the quarter. Diluted earnings per share were at $1.97, an increase of 22% year-over-year. Additionally, cash and cash equivalents rose by 52.1% to $3.76 billion at the end of the period. Q4 revenues are also expected to increase by at least 11%, with growth across all of Adobe’s segments.

Adobe is one of the best SaaS stocks out there, with 61.1% 12-month return.

Salesforce

Salesforce (CRM) is a cloud-based software company providing customer relationship management service and a suite of enterprise applications, including analytics and marketing automation. It is one of the original SaaS companies currently boasting the best CRM in the market. With a solid financial base, strong product offering and a healthy growth outlook, CRM stock is among the crème de la crème of the software industry.

Salesforce’s fiscal second-quarter earnings are a testament to the company’s sound business model. Revenue of $5.15 billion exceeded expectations by 4.97%, and so did earnings per share, by roughly 73% to $1.44. Sales across all its segments increased by a healthy margin, spearheaded by its cloud segment, up 20%. The full year’s revenue guidance falls in the $20.7 billion to $20.8 billion range, comfortably beating estimates.

Revenue growth over the past three years is at an impressive 27.2%. With the company’s investments in the next generation of cloud companies, it will continue to expand its market outreach. Hence, with a 12-month return of 53% compared to 14.2% for the S&P 500 index, CRM stock will remain a significant player in the SaaS industry and a recommended long-term portfolio holding.

DocuSign

DocuSign (DOCU) is an e-signature and digital transaction management company. It is currently the industry leader in its area of expertise and is looking to diversify its product portfolio. It aims to offer a complete digital contract lifecycle management solution and leverage artificial intelligence accordingly.

DOCU stock is one of the hottest SaaS stocks in the market, with a whopping 12-month return of 194.7% relative to the S&P.

It recently reported its stellar second-quarter results, which comfortably beat analyst estimates. Revenues of $342.2 million increased 45% year-over-year, and EPS was at 17 cents, 61.5% higher than analyst estimates. Subscription, professional services and billing revenue rose by 47%, 64%, and 25%, respectively. Additionally, current quarter guidance also looks solid with an expected EPS of 12 cents with revenues of $335.1 million.

The company’s agreement cloud portfolio is being hailed as a significant growth catalyst, which includes 12 native products and 350 integrations for various enterprises. It also includes programmable features and API features for developers for customized agreements. Hence, the company aims to provide a holistic digital contract solution for its users in the future.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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