Don't worry if you don't know exactly what software-as-a-service (SaaS) stocks are. Tech companies are developing all sorts of new technologies and services these days and it's nearly impossible to keep up. To keep things simple, all you need to know is that SaaS companies sell software to their customers as an ongoing subscription, instead of charging a one-time fee. For example, if you've ever used the work communication tool Slack, then you've used a software-as-a-service.
Investors should pay close attention to SaaS because the market is expected to grow from $158 billion this year to $307 billion by 2026. Additionally, the COVID-19 pandemic is forcing companies to adopt SaaS faster than ever before. If you're looking to add a few SaaS companies to your portfolio, read on to find out why DocuSign (DOCU -0.52%), Fastly (FSLY 1.99%), and Shopify (SHOP 3.37%) should be at the top of your list.
With DocuSign, e-signatures are just the beginning
Brian Withers (DocuSign): As companies of all sizes moved their office staff to work-from-home arrangements for safety reasons, workplaces adopted digital productivity tools to get things done virtually. One product that's become a key part of many businesses' remote-work toolbox is DocuSign's time-saving e-signature application.
In its most recent quarter (the first quarter of fiscal 2021), DocuSign added a record 68,000 new customers, bringing its total to 661,000. This growth represented a 30% year-over-year gain, an acceleration from its fourth-quarter growth of 24% and its 26% mark from Q1 a year ago. Large customers, which make up 88% of revenue, grew even faster at a 49% year-over-year rate and drove billings (revenue plus the change in outstanding contract value) up an impressive 59%. With its last reported quarter ending April 30, 2020, the full impact of coronavirus-powered growth may be yet to come. Interested investors should tune in as it announces its second-quarter results (covering the period May through July) after the market closes on Sept. 3, 2020.
Those who are familiar with this stock know that it's already been a huge winner for shareholders. In fact, just this year, the stock price has already more than tripled from its low in mid-March. Why would I be recommending this e-signature platform to triple again? I'll give you three reasons.
First, management believes the company only serves about 1% of global businesses in its target market, so there's still a massive opportunity to win new customers. Second, once a customer is on board, they realize there are more places the e-signature product can be used across the organization and expand usage naturally. This impact can be seen with its impressive dollar-based net expansion rate of 119% from the most recent quarter. Third, as customers implement e-signatures across their organizations, it could be just a starting point of an even bigger partnership with this software specialist.
DocuSign's Agreement Cloud product suite offers a full range of software modules to help organizations manage the entire life cycle of agreements digitally. This comprehensive set of cloud-based software tools could double its addressable market beyond its e-signature business. Although it's not material to the top line yet, this product's reputation is stellar, earning a Gartner Magic Quadrant leader commendation and capturing well-known customers such as Facebook and Aetna.
These three growth levers give DocuSign plenty of runway to expand its business. It's only a matter of time before this quality operator earns another triple for shareholders.
Fastly: Makes your website faster than a speeding bullet
Danny Vena (Fastly): When it comes to finding stocks that can triple, those that exhibit a couple of key traits are more likely to make the grade. Starting with a smaller market cap gives a stock sufficient room to climb. Additionally, a company that has been executing and is already achieving stellar growth will likely continue to do so -- winners tend to keep winning. It also doesn't hurt to have a serious tailwind to help usher things along.
Fastly meets those criteria and more, giving it the right ingredients to triple from here. The company's cutting-edge content delivery network (CDN) ensures rapid response times and timely delivery of websites, content, photos, videos, apps, and more. This helps consumer-facing apps and websites not only run faster, but better.
The company has quickly gained a phenomenal reputation among developers working for some of the biggest names in technology, including Shopify, Pinterest, and The New York Times, just to name a few.
With a market cap of less than $10 billion, Fastly still has plenty of room to grow. Additionally, the company's top-line growth was already hitting a fever pitch before it got a boost from the pandemic. In the second quarter, revenue grew 62% year over year, accelerating from 34% growth in the prior-year quarter. This helped push Fastly's adjusted net income into positive territory for the first time -- not bad, considering the company only went public in early 2019.
The customer count has been rising consistently, hitting 1,951 in the second quarter, up 20% year over year, notching the largest quarterly gains since the IPO. Even more importantly, enterprise customers are growing briskly, up 16% over the same period. The average spend among enterprise customers is growing even faster, climbing to $716,000, on average, up 29% year over year. These larger businesses now account for 88% of Fastly's revenue.
The dollar-based net retention rate, which measures spending by existing customers compared to the same quarter last year, grew to 137% in the second quarter, accelerating from 130% in Q1. Put another way, current customers are spending 37% more this year than they did last year.
Fastly's rapidly accelerating growth and quick transition to profitability has pushed the stock up 369% so far in 2020, and it's currently selling for 33 times next years' sales. While its valuation might seem frothy, consider this: Analysts expect Fastly's revenue to grow 50% in the current quarter, 48% in the current year, and 33% next year -- and the company has consistently defied expectations, so those numbers are likely conservative.
The need to deliver fast content isn't going anywhere, and in light of the pandemic, it may be more important than ever. This gives Fastly plenty of room for growth and the strong potential to triple your money in the months and years ahead.
An easy bet on e-commerce's rise
Chris Neiger (Shopify): The e-commerce market was expanding long before the pandemic came along, but COVID-19 has accelerated its growth. People are looking to online platforms to buy everything from home goods to home office equipment, and everything in between. As shoppers have shifted to e-commerce, Shopify has benefited by leaps and bounds.
The company's cloud-based platform allows businesses of all sizes to create and run e-commerce shops to sell their goods and services. The pandemic sped along Shopify's already staggering growth and in the company's second quarter (reported July 29), Shopify's total revenue spiked 97% to $714.3 million -- which was $200 million more than what analysts were expecting in the quarter.
If you're thinking Shopify's growth will slow down once COVID-19 is a distant memory, think again. On the company's second-quarter earnings call Shopify chief operating officer Harley Finkelstein said the pandemic "has catalyzed e-commerce, introducing major changes in buyer behavior and pulling forward what retail would look like in 2030 into 2020."
But you don't have to take Shopify's word for it. The latest data shows that e-commerce sales accounted for just 15.1% of total U.S. retail sales in the second quarter of this year. All of which means that e-commerce still has a lot of room to run.
Shopify's share price gains of 168% over the past 12 months have been nothing short of amazing. But don't think those gains mean there's nothing left for new investors. The e-commerce market is still in its early stages and with Shopify already an established player, the company will likely continue to tap this market for years to come.