The software-as-a-service (SaaS) business model has become the norm for many software companies. A SaaS stock is the stock of a publicly traded company that makes most of its money from selling software through the cloud.
Customers who subscribe to a software product that's continually updated benefit from the latest technology and increased pricing flexibility, while software businesses receive attractive streams of recurring revenue. The SaaS trend has been a significant driver of growth in the tech industry.
The valuations of SaaS stocks tend to be high, given that they are popular among investors, especially after the COVID-19 pandemic drove interest in all things tech. But buying high can lead to lackluster returns for investors, even if the company performs well. That said, there are some SaaS stocks with milder valuations.
Best SaaS stocks in 2025
If you want to invest in SaaS companies that are reasonably valued, consider these five options:
| Company | Ticker | Dividend yield | Industry |
|---|---|---|---|
| Microsoft (NASDAQ:MSFT) | $3.6 trillion | 0.70% | Software |
| Adobe (NASDAQ:ADBE) | $147.5 billion | 0.00% | Software |
| Salesforce (NYSE:CRM) | $246.8 billion | 0.63% | Software |
| Shopify (NASDAQ:SHOP) | $220.7 billion | 0.00% | IT Services |
| Palantir Technologies (NASDAQ:PLTR) | $462.7 billion | 0.00% | Software |
1. Microsoft
NASDAQ: MSFT
Key Data Points
For 45 years, Microsoft (MSFT +0.41%) has dominated the market for traditional software. Microsoft Windows is the standard operating system for PCs, and Microsoft Office remains the productivity suite of choice.
However, Microsoft's dominance was tested by the proliferation of mobile devices that do not use Windows, as well as competition from Alphabet's (GOOG +1.40%) (GOOGL +1.48%) Google products, including Google Workspace, Docs, Sheets, and Slides.
Microsoft eventually abandoned its PC-centric strategy, bringing first-rate versions of its Office applications to mobile devices and launching Office 365, a subscription-based version of Office. With Office 365 garnering at least 84 million consumer subscribers, Microsoft has preserved its lead in the productivity software market.
Another SaaS product from Microsoft is Teams, the company's collaboration software and competitor to Slack, which quickly gained subscribers during the pandemic. Teams aims to be a one-stop shop for collaboration by offering group chats, video meetings, and similar features.
Microsoft isn't a pure-play SaaS company, and its stock has historically been expensive relative to earnings. But the company has successfully transitioned to selling subscription-based software and grown its SaaS business by double digits while maintaining its market dominance. Both revenue and earnings have been growing swiftly, driven by its success in SaaS and the emergence of artificial intelligence (AI).
2. Adobe
NASDAQ: ADBE
Key Data Points
NYSE: CRM
Key Data Points
NASDAQ: SHOP
Key Data Points
NASDAQ: PLTR
Key Data Points
Benefits and risks of investing in SaaS stocks
Like other stock market sectors, SaaS stocks have their own set of characteristics that any investor considering them should understand. Let's take a look at some of the benefits and risks of SaaS stocks.
Benefits:
- SaaS stocks tend to have high growth rates.
- SaaS stocks tend to earn high multiples, meaning they can be worth a lot with relatively low revenue or profits.
- Saas stocks usually have gross margins and scalable business models, meaning their profit margins should improve as they grow.
- The total addressable market for SaaS stocks is promising, especially with the help of AI.
Risks:
- SaaS stocks' high multiples make them vulnerable to multiple compression and pullbacks.
- The sector is cyclical and has a history of falling sharply in bear markets.
- It's a highly competitive industry, and competitive advantages may not be as strong as they seem.
- Profits are often inflated for adjustments for things like share-based compensation.
Fast-growing SaaS companies often post large losses as they scale up their revenue.
How to pick SaaS stocks
Many investors use the price-to-earnings (P/E) ratio to evaluate a company's financial performance. However, with many SaaS companies not yet profitable, this type of analysis is not always possible. Instead, you can consider these two important metrics:
Customer acquisition cost
How much is a SaaS company spending to acquire each new customer? You can calculate the ratio of sales and marketing spending to revenue and evaluate whether that ratio is declining over time. If it's not, the company may be growing but still spending too much to bring in new customers.
Don't ignore SaaS company valuations
Microsoft, Adobe, and Salesforce may not be the most exciting SaaS stocks, but they're all profitable and sport valuations that don't require mental gymnastics to justify. Growth in subscription-based software, supercharged by AI, will create plenty of winners in the SaaS industry -- but ignoring valuation could be a recipe for disappointing returns.
Palantir may be the exception that proves the rule, but as a general rule, valuation eventually needs to be justified, no matter how promising the stock is.
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