When stock markets were falling in September and October, questions about technology stocks abounded. Some market participants believed that sluggish macroeconomic conditions would force companies to rein in their spending on IT. That weighed especially hard on software-as-a-service (SaaS) stocks, since any pullback in new subscription activity would further slow their growth.
In November, though, investors have gotten more confident about the economy's prospects, and that has generally been good for SaaS stocks. The bullish move for the industry got a nice boost late Wednesday, and shares of SaaS pioneer Salesforce (CRM 0.42%) are rising sharply along with those of data cloud specialist Snowflake (SNOW 3.69%). Read on to learn why investors are so excited about the prospects for these two companies.
Salesforce gets a lift from AI
Shares of Salesforce rose 9% in premarket trading on Thursday morning. The customer relationship management (CRM) software innovator reported fiscal third-quarter financial results for the period ended Oct. 31 that showed that its enterprise customers are hanging in there and spending more on its software platform.
Salesforce has been able to grow significantly, particularly given its size. Revenue climbed 11% year over year to $8.72 billion, with 13% growth in subscription-based revenue. Adjusted earnings of $2.11 per share were up by more than half from year-ago levels.
Salesforce has claimed the status as the top artificial intelligence (AI)-driven CRM, and demand for AI has helped support growth. The company said its current remaining performance obligations rose 14% to $23.9 billion, showing the extent to which customers are clamoring not just to keep subscribing to Salesforce's platform but also to add new functionality that opens up access to cutting-edge AI technology.
Tough industry conditions forced Salesforce and its peers to take steps to cut costs and become more efficient. Those efforts are paying off with higher profit margins, and with founder/CEO Marc Benioff seeing signs of persistent strength in Salesforce's niche, shareholders are increasingly convinced that AI could be the next driver of the rising tech star's growth.
Snowflake sees cloud strength
Meanwhile, shares of Snowflake rose 7% early Thursday. The data cloud specialist's fiscal third-quarter financial results for the period ended Oct. 31 also featured some signs that top SaaS providers could benefit from renewed demand, driven largely by AI.
Snowflake had revenue of $734 million for the quarter, with product-related revenue rising 34% year over year to $698.5 million. That was well above what Snowflake itself had anticipated three months ago, and adjusted earnings of $0.25 per share were up 56% from year-ago levels.
Big customers have always played a key role for Snowflake, and the SaaS company had great success getting more of its clients to spend on its platform. Net revenue retention rates stayed high at 135%, showing that current customers are increasing their use of the platform. Meanwhile, the total number of Snowflake customers rose 24% to over 8,900, and 436 of those clients spend $1 million or more on Snowflake products.
Snowflake CEO Frank Slootman said that he believes that the macroeconomic picture for his company is "broadly stabilizing," which is a nice boost from the deteriorating conditions that many tech companies have seen throughout much of the past year. Given how dependent AI applications are on large amounts of relevant data, Snowflake can expect to see plenty of enterprise customers clamoring for its services in order to make better use of the information they've collected.
