With more and more SaaS companies popping up every day, here’s the MyWallSt analyst team’s five favorite SaaS stocks.
Dec. 10, 2020
Software as a service, or SaaS as it’s come to be known, is one of the most exciting industries for investors. With the mass movement away from old license-based software models (remember paying a one-off fee for Microsoft Office?) and the rapid rise of the cloud, dozens of exciting new companies are now changing the way the world does business with these high-margin platforms.
MyWallSt’s 5 Best SaaS Stocks
While most people will never have heard of Jira, Confluence, or Bitbucket, you can be sure that many of the applications you use on your phone every day (including our MyWallSt app) were built with a heavy reliance on them.
Atlassian (NASDAQ: TEAM) is an Australian-based company that excels in stickiness. Pat Dorsey of Dorsey Asset Management once argued that to have a strong brand, you must do one of two things: have pricing power or lower your customer’s search costs. When we asked our head of development about Atlassian’s products, he signified that they have both.
98% of customers who spent more than $50k with Atlassian remained on as customers for the following year. Furthermore, over 90% who spent at that level purchased three or more products, implying that their tools are extremely complementary and, after a while, difficult to move away from.
That’s an incredibly strong economic moat to have.
Throughout your life, you’ll put your signature at the end of thousands of documents. Every shade of legal contract imaginable has required manual preparation, printing, postage, and stroke of the pen – followed by a return journey by emailed PDF or courier. Whether you’re a first-time home-buyer or a president signing a bill into law, the humble pen and paper have always been the moment of truth and final step.
DocuSign (NASDAQ: DOCU) is transforming this cornerstone of business by unblocking the signing bottleneck. They have opened the entire agreement process to automation and, in doing so, have become a clear leader in an area with room for massive growth.
Today, DocuSign has over 822 paying customers within which are 18 of the top 20 global pharmaceuticals, 7 of the top 10 tech companies and 10 of the top 15 global financial service companies.
Throw in the acceleration of digital transformation of business across the globe thanks to the pandemic, and we can see that the only way is up for DocuSign.
Peter Lynch, the author of ‘One Up on Wall Street’ and one of history’s greatest investors, loved boring companies. In his own words:
“The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name.“
There are few companies in the MyWallSt app more boring than Paycom (NYSE: PAYC), the producers of “one HR and payroll solution for managing employees from recruitment to retirement”. Paycom’s fundamentals are anything but boring though, with over 90% retention year after year, revenue growing by double digits and high margins – all the while expanding their sales force to new markets.
Paycom boasts happy employees, very high insider ownership, and a founder/CEO who has been ahead of the curve time and time again, building his company from nothing into a $25 billion business.
In 2004, David Duffield watched as the company he had founded 17 years earlier was swallowed up in a hostile takeover by tech giant Oracle. Months later, he started a new company, determined to go after Oracle’s bread and butter – large enterprise clients.
That company was Workday (NASDAQ: WDAY), a $50 billion software giant with Fortune 500 clients and a best-in-class product. Workday’s solutions allow enterprises to better manage their employees and finances, with the company taking in over $1.1 billion in sales in its most recent quarter.
What really strikes me about Workday is their commitment to providing the best possible solution to their clients though, spending over 40% of their revenue on research and development and updates coming out consistently every 6 months. That’s a company that’s focused on the long-game.
When it comes to looking for a good SaaS investment, we typically keep an eye out for three things:
- A land-and-expand sales model.
- A sticky product.
- The ability to cross or upsell to existing customers.
Zendesk (NYSE: ZEN), the makers of customer service management software, tick all of these boxes, and their success in the space is quickly being realized in their financial performance. Zendesk just realized a significant milestone of $1 billion in annual recurring revenue through serving over 160,000 customers. Primarily through its flagship product, Zendesk Support, which allows companies to manage customers from multiple channels (Facebook, Twitter, Google) all in one portal.
With visionary founding CEO (who still has a significant stake in the company) and a great company culture with happy employees, we think Zendesk is a premium SaaS company well-positioned to benefit from a global megatrend towards outstanding customer service.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Atlassian, DocuSign, Paycom, Workday, and Zendesk.