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Is the rise of SaaS stocks set to continue?

March 31, 2020

Software as a service (SaaS) stocks have remained resilient in the face of extreme economic turbulence, with SaaS share prices seemingly weathering the storm. Can they continue to deliver returns in 2020?

Software as a service (SaaS) stocks have proven to be a resilient sub-category of the technology market, particularly as the global economy struggles to defend itself against the Coronavirus pandemic. 

How SaaS stocks fare in the face of volatility

“More businesses than ever are looking for online solutions to their problems right now and SaaS businesses are in an ideal spot to provide those solutions,” Todd Dickerson, co-founder of SaaS marketing and sales platform ClickFunnels, tells Opto. “SaaS businesses, by definition, have more reliable recurring revenue channels than most others.”

SaaS stocks have carried their good run at the end of last year into 2020, with SaaS and cloud stocks surging to all-time highs. They have typically posted some of the strongest revenue growth results in the software sector. 

While SaaS is not quite the same as cloud services, the terms are used relatively interchangeably, and their performance at least can certainly be gauged using similar methods, with many SaaS businesses appearing among the Emerging Cloud Index’s constituents, for example.

Headwinds blowing against the cloud

The SaaS industry does face challenges, however. It can be difficult to effectively predict long-term performance. These companies often re-invest heavily in themselves, which changes their outlook. Then there is inevitable pandemic related challenges.

Despite this, there’s still an air of positivity around SaaS stock projections: “While some tangential consulting and event revenue has decreased since the start of the pandemic, our overall user base has grown. We’re doubling down and finding more creative ways to deliver as much value as possible,” Dickerson explains.

The big names in SaaS

Salesforce [CRM] is regarded as a pioneer of the SaaS movement. Founded in 1999, by current chairman and CEO Marc Benioff, it continues to dominate the market to this day. Amazon [AMZN] also has a large presence in the SaaS sector, with its Amazon Web Services unit launched in 2002.

However, Salesforce is working with narrow margins: a 0.74% profit margin, 2.94% operating margin and a 0.73% return on assets (TTM). With tight competition from the likes of Microsoft [MSFT] and Adobe [ADBE] — the latter of which has seen share gains of more than 340% over the past five years — the need to outperform is constant. 

Salesforce’s results also came with a surprise announcement — the departure of co-CEO Keith Block, after just 18 months on the job. On February 25th, the day the news was announced, sent shares down 2.6% in after-hours trading. 

Up and coming

The space has also seen market debuts from relatively new competitors, such as Okta [OKTA] and Twilio [TWLO], which floated in 2017 and 2016, respectively. 

IT consultant Gartner strongly endorsed Okta back in 2019 as part of its Magic Quadrant analysis, pitching the company ahead of the likes of Microsoft and IBM. This is unsurprising given Okta’s continued impressive growth. In its Q4 report, it announced 45% year-on-year revenue growth and a 30% year-on-year growth in customer numbers. Since its IPO, its stock has risen by near 400%.

Source – Opto