SaaS Stocks Are Down Huge: These 3 Companies Are Starting to Look Cheap

Software-as-a-service (SAAS) stocks have taken a big hit since the beginning of this year. Many investors have fled technology stocks as they look for other investments that they believe will grow as the U.S. economy begins to open back up. 

That shift from tech stocks has left some significant buying opportunities for investors who know that buying and holding great companies is the way to build wealth. To help you find some SaaS stocks that look cheap right now we asked a few Motley Fool contributors for some ideas. They came back with Zoom Video Communications (ZM 1.46%), DataDog (DDOG 1.19%), and The Trade Desk (TTD 0.85%). Here's why.

Image source: Getty Images.

Video users keep rising, the stock keeps falling

Nicholas Rossolillo (Zoom Video Communications): Zoom stock's incredible run has come to an end, at least for now. After running up by more than 700% from January to October 2020, the stock is now up "only" 300% since the start of 2021. To be fair, the valuation was getting a little out of hand last autumn. But as the economy gradually reopens, investor worry has mounted that the company's fast-growing global user base could stall out or even reverse course. So far, nothing could be further from the truth.  

After revenue and free cash flow skyrocketed 326% and 1,120% respectively in fiscal 2021 (the 12 months ended Jan. 31, 2020), management is forecasting another 42% jump in sales on top of that in the next year. Clearly, the more than 467,000 business customers with at least 10 employees aren't planning on parting ways with Zoom anytime soon. On the contrary, use of the cloud video communications service is expected to deepen even as effects from COVID-19 ease.  

Sometimes it takes a highly destructive event like a pandemic to wake many of us up to the benefits of technology. Zoom was growing before 2020 happened, but it became a household name overnight when lockdowns started. While no one would wish for it to happen again, these lockdowns revealed how useful Zoom is -- especially in business. There was a lot of unnecessary travel and commuting going on, and Zoom is unlocking more efficiency for companies that have embraced video calls. 

All of this is to say shares are beginning to look like a long-term value again. As of this writing, shares trade for about 60 times trailing-12-month free cash flow (the cheapest it's ever been as Zoom's profits have soared) and 22 times management's revenue forecast for the next year. That's far cheaper than the 35 times one-year forward sales Zoom was trading for right before the start of the pandemic last March, even though this is an enduring high-growth story. With business communications permanently altered in the last year, Zoom is in pole position in the cloud video industry and poised to continue benefiting for the foreseeable future.

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DataDog is just getting started

Brian Withers (DataDog): DataDog stock is seemingly in freefall, dropping more than 30% off its high from earlier this year. But the underlying business is stronger than ever. Let's take a look at the most recent results and why you might look at dipping your toe into this monitoring-as-a-service software specialist.

Its first-quarter revenue growth hit the high end of management's expectations, coming in at 51% year-over-year on top of 87% year-over-year growth the previous Q1. The company attributed existing customer usage growth, higher-than-expected annual recurring revenue from new customer contracts, and continued low churn for the outperformance. Its top line hit a record $199 million, but that's not what was most exciting. The company added about 1,000 customers in the quarter bringing the total to around 15,200 and its customers are spending more than ever. Clients that spend $100,000 or more annually make up 75% of the annual recurring revenue (ARR) and are growing at a strong 50% year-over-year rate. With the dollar-based net retention continuing above 130%, its existing customers are a substantial source of ongoing growth.

Data source: DataDog earnings reports and earnings calls. QOQ = quarter over quarter. YOY = year over year.

The company's products are popular with customers. At the end of Q1, 75% of all customers are using more than one monitoring product, which is up from 63% last year. The number using four or more more than doubled to 25%, up from 12% a year ago. This quarter it reported notable customer wins in a variety of industries including consulting, grocery, and financial services. Its broad set of offerings is helping customers make monitoring its information technology simpler and more powerful. This quarter, EVA, an online gaming company, went from using eight different observability tools to standardizing on DataDog's single platform for all its monitoring needs.

Lastly, the strong 81% growth in remaining performance obligations shows that customers are signing larger and lengthier contracts. All of this points to a bright future for this lead dog. 

With an addressable market of $35 billion, this monitoring and observability platform is just getting started. But even with the latest drop in the stock, value investors may be scared off by the still lofty 35 price-to-sales ratio. For tech investors with a view that businesses will continue to move to cloud-based services, this (Data)dog could become investors' best friend over the next decade.

Image source: Getty Images.

This advertising platform stock is hugely discounted right now

Chris Neiger (The Trade Desk): Investors looking for a great SaaS stock that looks like a screaming buy right now should consider The Trade Desk. If you're unfamiliar with what the company does, Trade Desk's advertising platform helps companies deliver ads across the internet, mobile devices, and connected TVs.

In The Trade Desk's first quarter (reported on May 10) the company's revenue rose 37% year over year to $219.8 million and its adjusted diluted earnings of $1.41 blew past Wall Street's consensus estimate of $0.77 per share.

But investors were unimpressed. Some analysts think investors may have been looking for a bigger earnings beat than the company delivered, but no matter what the reason the company's share price tumbled following the quarterly report and now The Trade Desk's stock is down 37% year to date.

Here's the important part: There's nothing fundamentally wrong with The Trade Desk's business that should cause investors to push the company's share price down so much. In fact, the company is successfully tapping into the connected TV advertising market, which is expected to double in size between 2020 and 2024.

The Trade Desk still has a customer retention rate above 95% and its advertising platform is benefiting from a growing shift of advertising dollars from traditional TV to connected TV platforms. 

Despite the massive share price drop this year The Trade Desk's stock is still up 70% over the past 12 months. And once investors come to their senses and recognize that The Trade Desk's business is as healthy as ever, it's likely that this SaaS stock will climb even higher.