In the world of software-as-a-service (SaaS) stocks, there is no shortage of popular names. Often these hot names also come with inflated valuations and/or unrealistic expectations. As we turn the page to 2022, there are two SaaS businesses with impressive results that are not always top of mind for investors. ServiceNow (NOW -1.72%) and BlackLine (BL -1.32%) are companies investors should know and consider adding to their portfolios in 2022.
1. ServiceNow: Behind-the-scenes value
ServiceNow's stated purpose is to "make the world of work, work better for people." The company does this by offering a number of software solutions that help over 60,000 large enterprise customers in a variety of areas such as information technology, human resources, and customer service management, just to name a few. With products that are not customer-facing, it's easy to understand why ServiceNow may not be known by most investors. However, the results are worthy of more attention.
The long-term story for ServiceNow is one of impressive, sustained growth. In the third quarter, revenues from subscriptions -- by far the vast majority of overall revenues -- were $22 million above the high end of the company's guidance, a 31% year-over-year increase. Gross profit also grew to $1.2 billion.
As shown in the chart above, this is par for the course as revenue has steadily increased over the past several years. While net income has remained level, it's important to remember that ServiceNow has been able to remain profitable while investing heavily into its business, something made possible by its revenue growth. Over time, net income should start to tick up.
ServiceNow is also inking some high-value agreements. In Q3 the company reported a 25% increase in existing customers paying more than $1 million in annual contract value (ACV), as well as a 50% increase in new deals with an ACV greater than $1 million. The company also increased its guidance, making its goal of more than $15 billion in revenue by 2026 seem even more likely.
2. BlackLine: A simple solution for businesses
Operating in the background of many businesses, BlackLine helps accounting departments. The job of wrapping up a month, quarter, or year for the accounting departments of large companies is time-consuming and stressful. BlackLine offers a product that provides "continuous accounting" so this end-of-period work can be completed on an ongoing basis.
Much like ServiceNow, BlackLine is growing its revenues and customers steadily. In Q3, year-over-year revenue increased 21% to $109 million, which is in line with historical growth. Gross profit followed suit at $85 million. Although the net loss of $14 million was worse than the $9 million loss in Q3 of 2020, the last quarter was the second consecutive step in the right direction from the $39 million net loss in first-quarter 2021.
BlackLine has 3,704 total customers and over 315,000 total users, customer growth metrics that are up 15% and 12% over the third quarter of 2020. BlackLine's products are also proving to be popular with customers, as the company's dollar-based net retention rate is 108%. In short, customers are spending 8% more than they did last year.
Management says they've seen five straight quarters of increased demand that now has the company above pre-pandemic levels. It's their belief that spending on their product will only increase moving forward. Time will tell if this pans out, but both financial and customer growth are heading in the right direction.
Two different reasons to buy for 2022
Of the two companies, ServiceNow is in the stronger position. It's larger (a market cap of $120 billion), is growing more quickly, and is sustainably profitable. It's also the more expensive of the two, with a price-to-sales (P/S) ratio of 22. However, BlackLine presents a compelling value for what is still strong growth. Its P/S of 14 is the lowest it's been since July of 2020. While its price-to-free cash flow of 117 isn't exactly cheap, it is only slightly above its low for the trailing 12 months. Both of these companies should continue to lead the modernization of how businesses operate, making them stocks to buy in 2022.