Back in the early 2000s, most software products were installed locally on PCs. But as internet speeds improved, more companies transformed their software into cloud-based services, which could be operated remotely, continuously updated, and transformed into subscription-based services.
This "software-as-a-service" (SaaS) model is a core pillar of the cloud computing market, and it could still grow at a compound annual growth rate of 12.5% between 2021 and 2025, according to Research and Markets. To tap into that market's growth, investors should consider buying shares of Adobe (ADBE -0.19%), DocuSign (DOCU -1.64%), and Veeva Systems (VEEV -0.03%) -- which each dominate their respective SaaS markets.
Over the past eight years, Adobe transformed all of its desktop-based software -- which included Photoshop, Illustrator, Acrobat, Premiere Pro, and other essential tools -- into subscription-based cloud services.
That transformation locked in more customers and replaced its cyclical upgrade cycles with stable recurring revenue. It also enabled Adobe to launch other cloud-based sales, marketing, e-commerce, and analytics services for enterprise customers.
Adobe's revenue rose 15% in 2020, even as the pandemic throttled the growth of its enterprise and marketing-oriented services. However, its revenue rose 24% year over year in the first nine months of 2021 as those headwinds waned, and analysts anticipate 23% growth for the full year.
Adobe is firmly profitable, and Wall Street expects its earnings to grow 24% this year as its Creative and Digital Experience (enterprise) clouds continue to gain more subscribers. Adobe's stock isn't cheap at 40 times forward earnings, but the stickiness of its ecosystem, the essential nature of its industry-standard software services, and its robust growth rates all justify that slight premium.
DocuSign controls about 70% of the world's e-signature services market. It serves 1.05 million paying customers worldwide, including most of the top financial, healthcare, and technology companies in the Fortune 500. It's simplified the process of signing documents for more than a billion users worldwide.
Two years ago, DocuSign bundled all of its web, email, and mobile app signature services with its contract lifecycle management services in its subscription-based DocuSign Agreement Cloud. That move locked in more customers and widened its moat against its smaller competitors.
DocuSign's revenue rose 49% in fiscal 2021, which ended this January. It thrived throughout the pandemic as fewer people signed documents in person, and its revenue increased another 53% year over year in the first half of fiscal 2022. Analysts expect its full-year revenue to increase 44%.
DocuSign isn't profitable by GAAP measures yet, but its losses are gradually narrowing. It's already profitable on a non-GAAP basis, and analysts expect its earnings to nearly double by that measure this year. DocuSign's forward P/E ratio of about 120 times reflects that optimism, but its first mover's advantage in its essential market supports that higher multiple.
Veeva provides cloud-based customer relationship management (CRM) services to life science companies. It serves more than a thousand customers, including pharmaceutical giants like GSK and Merck.
Veeva also provides other cloud-based services for storing data, analyzing it, and keeping track of the latest regulations and clinical trials. Veeva enjoys a first mover's advantage in its niche market, and fierce competition between drugmakers keeps them tightly tethered to its services.
Veeva's revenue rose 33% in fiscal 2021, which ended this January. The pandemic didn't affect its core businesses, and the race to develop new vaccines and treatments for COVID-19 highlighted the importance of its services. Its revenue rose 29% year over year in the first half of fiscal 2022, and analysts expect 25% growth for the full year. Veeva also aims to generate about $3 billion in annual revenue by calendar 2025 -- more than double its revenue of $1.47 billion in fiscal 2021.
Veeva is profitable by both GAAP and non-GAAP measures, since its market dominance gives it plenty of pricing power. Wall Street expects its adjusted earnings to grow 22% this year.
Veeva's stock is pricey at nearly 70 times forward earnings. However, its dominance of its growing market, a lack of big competitors, and its ambitious growth targets all support that higher valuation.