SOftware-as-a-service (SaaS) stocks can be quite lucrative investments. The business model is subscription based, which allows customers to pay monthly fees. Since software is often an integral part of the operations of the organizations that use it, customers are likely to remain loyal to the vendors they have signed up with and expand their business with them over time. In addition, software has minimal costs for physical production and distribution, which allows these companies to operate with high gross margins.
The top three SaaS actions investors should consider today are Shopify (NYSE: SHOP), Procore (NYSE: PCOR), and Twilio (NYSE: TWLO).
Image source: Getty Images.
This Canadian e-commerce giant offers businesses an online presence. With well-priced options for businesses of all sizes, Shopify gives even the smallest start-ups an affordable way to reach customers on the internet. It also provides marketing and payment processing tools.
Shopify’s platform, according to eMarketer, facilitated the second-largest share of ecommerce sales in the United States last year – behind only Amazon, and even before huge retailers like Walmart or marketplace operators like eBay.
Although it is still far behind Amazon in terms of market share, during the third quarter Shopify increased its revenue by 46% while its gross merchandise volume (GMV) increased by 35% to 41.8. billions of dollars. Plus, she has over $ 7.5 billion in cash on her balance sheet – money she can put to work to grow her operations.
Shopify has been a remarkable stock over the past five years, up over 3,500%. Still, management expects its GMV to grow faster than Q4 trade in general. He also has long-term goals to create a distribution network and develop a business-to-business platform. With ambitious expansion plans and growth to come, every growth investor should consider owning Shopify.
Procore’s SaaS offering targets the construction industry. It allows owners, contractors and subcontractors to connect with each other and bring all the information about a project together in one place. Construction is one of the latest industries to join the SaaS revolution and Procore is leading the way.
Its revenue grew at a solid 30% rate in the third quarter to $ 132 million, and it generated free cash flow of $ 6.5 million. Unlike many SaaS companies, Procore doesn’t focus on expanding as quickly as possible. Instead, it allows customers to find its platform organically. It does this by allowing paying customers to add non-paying users to a project. Once these companies realize the benefits of managing projects with Procore, they are more likely to sign up and become paying customers.
Procore is at a much earlier stage of growth than Shopify; it believes it has won over 2% of its potential customers and less than half of its current customers subscribe to at least four of its 13 products. Its global expansion is progressing; Procore, for example, will start operating in France and Germany next year.
Autodesk (NASDAQ: ADSK) competes with Procore with its Construction Cloud product. However, Procore expects global construction spending to reach $ 14 trillion by 2025. As such, the construction management software space has plenty of room for multiple players. If it can channel even 5% of spending through its platform, Procore will be a successful investment.
With a broad avenue for future growth, Procore is a great SaaS stock for the future.
If you’ve ever communicated with a business via text message, there’s a good chance Twilio will help you. It provides application programming interfaces (APIs) so that businesses can build communication tools without the need of their own software engineers. It offers a usage-based pricing model that generates more revenue for Twilio as its customers grow.
Twilio is the fastest growing of the three companies, with third quarter revenue up 65% year over year. It also boasts an impressive 131% net revenue expansion rate, meaning existing customers spent 31% more in the quarter than in the prior year period. And while some of Twilio’s growth has come from acquisition companies, its organic growth rate still stands at an impressive 38%. Concentration risk is reduced as only 11% of total revenue is attributed to its top 10 accounts, compared to 14% in the third quarter of last year.
The desire and need for businesses to communicate with customers will only increase, and Twilio is making it easier for them. Management is committed to achieving organic growth of 30% or more per year over the next three years, which would increase revenue to over $ 5.5 billion using revenue from the past twelve months. of the third trimester.
Twilio is showing no signs of slowing down and investors should take note.
With these three actions, valuation is a concern. While the price-to-sell ratio of Twilio and Procore shares has fallen recently, that of Shopify has remained fairly stable. Shopify is also valued more than the other two as the market considers its ecommerce opportunity to be huge. Even at these levels, valuation still represents a potential investment risk. However, each deserves a high multiple due to solid execution and future expectations. If any of the companies start to go bankrupt, the valuation will drop to reflect the sense of the future. Attractive growth prospects often come with valuation risks, and it is up to companies to deliver on their long-term promise.
BUY PS Ratio Data by YCharts
As the world becomes more and more connected, SaaS offerings provide businesses with powerful tools they can use to increase efficiency and productivity. Savvy investors should consider buying all three of these stocks, but beware of the risks. Holding these stocks seems like a great way to beat the market for the long haul.
10 actions we prefer over Shopify
When our award-winning team of analysts have stock advice, it can pay off to listen. After all, the newsletter they’ve been running for over a decade, Motley Fool Equity Advisor, has tripled the market. *
They just revealed what they think are the top ten stocks investors can buy right now … and Shopify wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
See the 10 actions
* The portfolio advisor returns on November 10, 2021
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Keithen Drury owns shares of Procore Technologies, Inc., Shopify and Twilio. The Motley Fool owns stock and recommends Amazon, Procore Technologies, Inc., Shopify, and Twilio. The Motley Fool recommends eBay and recommends the following options: January 2022 long calls at $ 1,920 on Amazon, January 2023 long calls at $ 1,140 on Shopify, January 2022 short calls at $ 1,940 on Amazon, short calls from January 2022 at $ 82.50 on eBay and January 2023 short calls at $ 1,160 on Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.