With the Massive Tech Sell-Off, 3 SaaS Stocks We'd Buy Without Hesitation

Tech investors have been gritting their teeth as many of their favorite stocks have sold off considerably since November. The tech-heavy Nasdaq Composite index is down more than 15% off its high, but that figure doesn't tell the tale of what is happening to individual investors.

The Nasdaq index is weighted by market cap so larger companies (which are typically less volatile) can help reduce the impact of broad downturns. For instance, Apple and Microsoft, which make up more than 20% of the index, are down only 10% and 16% off their highs respectively, whereas many smaller market cap tech companies are down 40%, 50%, or even more from their recent highs.

Given the state of the market today, we asked three longtime Fool contributors to pick their favorite software-as-a-service (SaaS) stock that they would buy right now, without hesitation. They picked Shopify (SHOP 0.60%), Palantir (PLTR -2.81%), and Monday.com (MNDY -3.52%).

Image source: Getty Images.

Shopify: Throwing the baby out with the bathwater

Danny Vena (Shopify): Given the significant sell-off that has plagued tech stocks in recent months, the market is offering up plenty of fast-growing online retail companies at a discount. Evidence suggests that this could represent a massive opportunity for savvy investors.

Even after hitting record levels in 2021, worldwide e-commerce sales are expected to climb to $5.5 trillion in 2022, rising to $7.4 trillion by 2025. Perhaps more impressive is the fact that nearly 20% of every retail dollar spent in coming years is expected to come from digital retail. This illustrates the large and growing opportunity for Shopify.

The company's software-as-a-service (SaaS) platform is the leading provider of digital retail solutions for merchants. Furthermore, what began as a way for small- and medium-sized companies to join the e-commerce revolution quickly expanded to include enterprise-level businesses as well.

Shopify provides merchants with all the cloud-based tools they need to set up and maintain an online retail operation. This includes simple things like setting up a website and more complex solutions like helping merchants consolidate sales from across multiple channels, including social media, web, mobile, online marketplaces, and can even brick-and-mortar stores.

The company provides solutions to simplify many of the day-to-day chores necessary to succeed, including inventory, payments, product management, shipping and fulfillment, and even working capital loans for qualifying merchants.

Given the stock's 66% plunge since mid-November, you might be tempted to think Shopify's business is in trouble, but that's simply not the case. With the S&P 500 and Nasdaq Composite both in correction territory, some investors have abandoned many high-growth stocks in search of safe havens -- but the selling has simply gone too far.

Consider Shopify's recent results. Revenue grew 57% year over year in 2021, an impressive feat considering that was on top of a 96% increase in 2020, fueled by the pandemic. It's also telling that gross profit grew 61%, outpacing revenue growth, as the company leveraged its growing scale. At the same time, adjusted net income surged 66%. 

Shopify boasts a base of more than 1.7 million merchants, but this could be just the beginning. The company generated revenue of more than $4.6 billion last year, but that pales in comparison to Shopify's total addressable market, which management estimates at roughly $153 billion. 

Giving its industry-leading solutions, growing addressable market, and the secular tailwinds fueling accelerating e-commerce adoption, investors would do well to buy Shopify now, before the market realizes its oversight.

Image source: Getty Images.

Palantir: Investors should consider targeting this analytical insight company 

Will Healy (Palantir): Palantir is the SaaS stock taking data analytics to a new level. Its Apollo operating system is a tool designed to make analytical insights. This functionality helps it to stand out from Snowflake, which seeks to collect data, or Alteryx, which focuses on data processing and presentation. Due to these differences, Palantir does not have a true competitor.

Knowing this, it has applied Apollo to two different software systems, each targeting different markets. The Gotham system delivers analytical insights in the national defense and law enforcement realms. Analysts credit Gotham with finding Osama bin Laden, among other successes.

Palantir's Foundry system differs in that it seeks to apply these capabilities to drive business-related initiatives. The transition to a commercial focus may have brought some uncertainty to the stock. However, given the limited number of customers for its government-related business, targeting commercial customers is arguably a necessary step.

Palantir seems to have succeeded in both markets. In 2021, government revenue grew 47% year over year, exceeding the 34% increase in the commercial segment during that period. This will likely not surprise investors concerned about the conflict in Europe. However, the software has become more popular with U.S. companies as commercial revenue in the U.S. surged 102% during that timeframe.

These successes led to the company generating more than $1.5 billion in revenue in 2021, a 41% increase compared with 2020 levels. Boosting this number was a net retention rate for the year of 131%. This means its average existing customer spent 31% more than in 2020.

Moreover, the company slashed its cost of revenue and operating expenses in 2021. This reduced losses to $520 million from nearly $1.2 billion in 2020. Additionally, the company projected 30% annual revenue growth through 2025, a sign that customers have derived increasing utility from Gotham and Foundry.

Despite a strong earnings report, Palantir has lost more than half of its value over the last year amid a tech sell-off. That has taken its price-to-sales (P/S) ratio down to 14, its lowest point since late 2020.

Admittedly, the increased focus on commercial customers could bring some temporary uncertainty. Nonetheless, its lower valuation, along with the company's rising revenue and industry tailwinds, could make Palantir a good investment for 2022.

Image source: Monday.com

Monday.com: It has a massive growth runway

Brian Withers (Monday.com): Monday.com is a no-code platform that enables non-tech people to build powerful software tools for the workplace. Whether it's a customer relationship database, a project management tool, or a dashboard to track operational performance, Monday.com's software has off-the-shelf templates to get up to speed quickly. Its WorkOS software is rapidly replacing a patchwork quilt of whiteboards, sticky notes, spreadsheets, and emails with scalable collaborative applications. In fact, co-CEO Eran Zinman said in the most recent earnings call that when management approaches large enterprises, "70% of the deals we see literally no competition." 

Let's check out the latest quarterly results to see how rapidly this software is catching on. Top-line revenue is growing at a torrid pace and management is expecting in excess of 70% growth in the first quarter. What's even more impressive is that this is on top of a tough comp of 219% year-over-year growth recorded in the first quarter of 2021. Much of this growth is because large customers, with greater than $50,000 in annual recurring revenue (ARR), are growing at a triple-digit rate. This is because its net dollar retention, the average amount all customers spend compared to last year, continues to accelerate.

Data source: Company earnings releases. QOQ = quarter over quarter. YOY = year over year.

But even with these incredible growth numbers, there's plenty of room to grow. With a total addressable market of $56 billion, the company's $384 million annual run rate is less than 1% of what's possible.

As businesses look to embrace the new world of hybrid working arrangements, tools like Monday.com Work OS become critical enablers to ensure everyone is on the same page, no matter where they work. With the stock trading below its initial public offering price, this company has never been at a more attractive valuation. Savvy investors would do well to pick up some shares on the cheap and sit back and enjoy the market-beating performance over the next five to 10 years.