5 SAAS stocks to buy and hold forever
What is a SAAS company?
A Software as a service (SAAS) is a company that provides software products through the internet. Also known as cloud-based software, SAAS companies have changed how people work and how they access technology products.
A good example of a SAAS company is Adobe, the maker of Photoshop and other software programs. In the past, the company used to sell its program using a disc drive for hundreds of dollars. Today, customers pay less than $10 per month to access some of its most popular programs. Other companies that have transitioned their business to SAAS are Microsoft and Autodesk.
Investors love SAAS stocks because of their fast growth, higher margins, often lower churn rates, and easy-to-forecast free cash flows. As a result, these companies have been among the best-performing stocks in the United States. For example, in the past five years, the SPDR S&P Software & Services ETF (XSW), which tracks SAAS companies has outperformed the S&P 500 as shown below.
SPDR S&P Software & Services ETF vs S&P 500
Salesforce (Nyse: CRM)
Started in 1999, Salesforce has become one of the biggest SAAS companies in the world. The firm offers customer relations management (CRM) services to small, medium, and large-sized companies in the world.
Over the years, it has expanded its business organically and through acquisitions. Among its biggest acquisitions were Tableau Software and MuleSoft. Tableau Software helped it expand its services to business intelligence while MuleSoft helped it get into integration services.
Salesforce is a good SAAS stock to buy and hold forever for several reasons. First, it has a large moat in the CRM business. According to Gartner, the firm has a 19% market share in CRM, which is more than double that of SAP, the second-biggest company in the industry.
Second, Salesforce business has been growing rapidly. For one, the company’s revenue has grown from $1.6 billion in 2011 to more than $17 billion in 2019. And analysts expect that its revenue will reach $89 billion in 2030. Third, Salesforce has higher margins, lower churn, and a strong balance sheet.
Salesforce share price has outperformed the S&P 500 in the past five years as shown below.
Salesforce vs S&P 500
Microsoft (Nasdaq: MSFT)
In the past few years, Microsoft has transitioned itself from a licensed software seller to a SAAS juggernaut. As of this writing, the company has a market cap of more than $1.5 trillion and is the biggest SAAS company in the world.
Microsoft offers its SAAS products through its Productivity and Business Processes (PBP) segment. These services include Microsoft Office 365, Teams, OneDrive, and Dynamic.
There are several reasons why you should invest in Microsoft. First, like Salesforce, it has a large market share in most industries it competes in. For example, Microsoft Office is the preferred software for word processing and analysis. Similarly, Microsoft Teams is the second-biggest communication and collaboration platform in the world.
Second, Microsoft has a large diversified business. For example, Microsoft Azure is the second-biggest cloud provider in the world after Amazon. And this segment is expected to continue growing as companies move their workload to the cloud. It is also a big player in gaming and servers.
Third, Microsoft has an impressive balance sheet, a growing dividend, and is in an industry that is expected to grow exponentially as companies move to the cloud. The chart below shows that Microsoft, like Salesforce, has outperformed the S&P 500 in the past five years.
Microsoft vs S&P 500 5-year performance
Adobe (Nasdaq: ADBE)
Started in 1982, Adobe has quietly transformed its business from one that depends on packaged software into one of the biggest SAAS firms in the world. It has a market capitalisation of more than $227 billion. In addition to software like Photoshop and Premier, the company has expanded its business to other sectors like digital media and digital experience.
Adobe’s revenue has been in a strong upward growth in the past few years. It has grown from more than $3.8 billion in 2010 to more than $11 billion in 2019. And analysts expect that the firm’s revenue will hit $32 billion in 2028. At the same time, its net income has grown from more than $774 million to $2.9 billion.
Adobe is a good SAAS stock to invest in because of its strong balance sheet, strong total addressable market, high margin, high revenue and profitability growth, and its strong market share. For example, according to Gartner, Adobe is the market leader in multichannel marketing hubs. The chart below shows that Adobe has outperformed the S&P 500 in the past five years.
Adobe vs S&P 500 - 5-year performance
Shopify (Nasdaq: SHOP)
Shopify is a SAAS company that provides e-commerce software to companies of all sizes. Through its platform, the company has helped more than 1 million companies launch and manage their e-commerce stores without coding.
Shopify business model is relatively simple. The company charges store owners a monthly fee that starts at $29 per month. It then charges them a fee for every product they sell. In addition, it offers other tools like marketing, plugins, and point of sale. As such, analysts estimate that the company’s average revenue per user (ARPU) is about $130 per month.
Shopify’s revenue has been on an upward trend as more people shop online. It has risen from $23 million in 2012 to more than $1.5 billion in 2019. According to Seeking Alpha, analysts expect the firm will make more than $30 billion in 2030.
In addition to revenue growth, Shopify has a strong moat in e-commerce, has an enviable balance sheet, and has limited churn.
Shopify has outperformed the S&P 500 by far
DocuSign (Nasdaq: DOCU)
Started in 2003, DocuSign is one of the biggest e-signature companies in the world. According to Gartner, the company has the biggest market share in several sectors, including in Contract Cycle Management. It has also been growing rapidly as more companies shift their workloads online. It has more than 500,000 customers from around the world.
DocuSign is a key SAAS stock to own for several reasons. First, it has continued to add thousands of clients leading its revenue to grow from $250 million in 2016 to more than $974 million in 2019. If it continues with this pace of growth, analysts expect the company’s revenue will reach $6.6 billion in the next decade.
Second, although DocuSign is currently making a loss, it has the potential for high margins in the future. Finally, like the other SAAS stocks mentioned above, the company has a large total addressable market and moat.
DocuSign has outperformed the S&P 500
SAAS companies are growing rapidly as most companies shift their workloads online. Still, analysts warn that more companies and people are yet to move to cloud. This creates an exciting opportunity for long-term investors to acquire companies with fast revenue growth, an attractive moat, and strong margins. In addition to the five we have mentioned, other companies you can consider investing in are Twilio, Square, ServiceNow, and Okta.