The SaaS (Software as a Service) industry encountered various macroeconomic headwinds last year, including aggressive Fed rate hikes, multi-decade high inflation, and geopolitical upheaval arising from the Russia-Ukraine war. Over the past year, the tech-heavy Nasdaq Composite fell more than 18.6%.

However, the SaaS industry is expected to expand exponentially over the coming years owing to the continued transition of enterprise software vendors and their customers to the cloud since this is a crucial part of business operations in today’s digital world. Moreover, emerging trends, including the incorporation of AI, vertical-specific applications, usage of blockchain, and transaction-based models, are rapidly transforming the industry.

The SaaS market’s growth is accelerated by growing investments made by enterprises owing to the rising adoption of public cloud services. According to a forecast from Gartner Inc. (IT), worldwide end-user spending on cloud application services (SaaS) services is expected to grow 16.8% year-over-year to reach $195.21 billion in 2023.

Sid Nag, Vice President Analyst at Gartner, said, “Cloud computing will continue to be a bastion of safety and innovation, supporting growth during uncertain times due to its agile, elastic and scalable nature.”

Based on a report by Fortune Business Insights, the global SaaS market is projected to reach $716.52 billion by 2028, growing at a 27.5% CAGR.

Given the industry’s bright prospects, it could be wise to invest in quality SaaS stocks Informatica Inc. (INFA) and Park City Group, Inc. (PCYG). However, Palantir Technologies Inc. (PLTR) might be best avoided due to its weak financials and bleak growth prospects.

Stocks to Buy:

Informatica Inc. (INFA)

INFA develops an artificial intelligence-powered platform that links, manages, and unifies data at a corporate scale across multi-cloud, hybrid systems. The platform includes data management tools, API, and application integration products that allow customers to create and manage APIs and integration processes.

On November 9, 2022, INFA announced the expansion of its SaaS version of multidomain Master Data Management (MDM) with Microsoft Azure to service greater Asia Pacific and Japan markets due to the growing client demand for multitenant cloud MDM solutions. Given the increased reach of Microsoft Azure in the region, INFA could strategically benefit from this partnership.

Moreover, on October 12, the company signed a multi-year strategic framework agreement to provide enterprise data management services to Abu Dhabi government entities.

INFA would be a non-exclusive provider to all 76 Abu Dhabi Government Entities, allowing them to use the Intelligent Data Management Cloud (IDMC) to manage, own, and derive insights from their data across any platform for any user in multi-hybrid environments. This could greatly aid the company’s expansion and growth.

INFA’s trailing-12-month gross profit margin of 79.68% is 62% higher than the 49.18% industry average, while its trailing-12-month EBITDA margin of 11.67% is 4.8% higher than the 11.14% industry average. Likewise, the stock’s trailing-12-month levered FCF margin of 20.97% is 196.9% higher than the industry average of 7.06%.

For the fourth quarter that ended December 31, 2022, INFA’s subscription revenues increased 4% year-over-year to $238.40 million. Its income from operations stood at $28.90 million, compared to a loss of $1.20 million in the prior year’s quarter. Also, the company processed nearly 53 trillion cloud transactions per month, up 91% year-over-year.

The consensus revenue estimate of $1.59 million for the fiscal year ending December 2023 indicates a 5.8% year-over-year improvement. The consensus EPS estimate of $0.85 for the ongoing year reflects a 9.1% rise from the prior year. Also, INFA surpassed its consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Shares of INFA have gained 18.8% over the past month to close the last trading session at $18.58.

INFA’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has a B grade for Value. In the 28-stock Software – SAAS industry, it is ranked #3.

Beyond what we stated above, we also have INFA’s ratings for Growth, Stability, Sentiment, Quality, and Momentum. Get all INFA ratings here.

Park City Group, Inc. (PCYG)

PCYG is a software-as-a-service company that creates and sells proprietary software solutions. Additionally, it provides suppliers and retailers with business consultancy services. Its primary customers are multi-store retail chains, wholesalers, distributors, and suppliers.

On December 13, 2022, ReposiTrak, a PCYG company and the biggest network of food supply chain operators, welcomed Haven Foods, LLC to its ReposiTrak Traceability Network®.  With a cost that doesn’t affect margin, the ReposiTrak Traceability Network synchronizes what they send in any format and makes it usable and accessible.

The company might strategically gain by assisting Haven Foods with its challenge of extracting that data and structuring it in a way that enables the company to share it with customers and use it for business insights.

The stock’s trailing-12-month gross profit margin of 82.57% is 67.9% higher than the 49.18% industry average, while its trailing-12-month levered FCF margin of 32.77% is 364% higher than the 7.06% industry average. Moreover, PCYG’s trailing-12-month net income of 23.84% is 646.9% higher than the 3.19% industry average.

The company’s total revenue grew 3.5% year-over-year to $4.72 million in the fiscal 2023 first quarter that ended September 30, 2022. Its income from operations rose 5.3% from the year-ago value to $1.23 million. Furthermore, the company’s net income and EPS increased by 35.7% and 50% from the prior year’s period to $1.29 million and $0.06, respectively.

Analysts expect PCYG’s revenue to increase 6.1% year-over-year to $19.14 million for the fiscal year ending June 2023. The company’s EPS for the ongoing year is expected to rise 30.4% from the previous year to $0.28. Furthermore, the company surpassed its consensus estimates in all four trailing quarters.

The stock has gained 15.1% over the past month to close the last trading session at $6.25.

PCYG’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.

PCYG has an A grade for Quality and a B for Stability and Sentiment. It has topped the Software – SAAS industry.

In addition to the POWR Ratings I’ve just highlighted, you can see PCYG ratings for Growth, Value, and Momentum here.

Stock to Avoid:

Palantir Technologies Inc. (PLTR)

PLTR develops software that aids businesses in integrating their operations, decisions, and data at scale. Its segments include Commercial and Government. It has developed three principal software platforms: Palantir Gotham, Palantir Foundry, and Palantir Apollo.

PLTR’s trailing-12-month CAPEX/Sales of 2.24% is 10.5% lower than the 2.50% industry average. Moreover, its trailing-12-month ROCE, ROTC, and ROTA of negative 24.20%, 4.92%, and 16.90% compare to the industry averages of 4.87%, 3.01%, and 1.47%, respectively.

For the third quarter that ended September 30, 2022, PLTR’s total operating expenses increased 8.9% year-over-year to $432.46 million. Its loss from operations stood at $62.19 million. Furthermore, the company’s net loss and net loss per share widened 21.3% and 20% year-over-year to $123.88 million and $0.06, respectively.

Analysts expect PLTR’s EPS to decline 65.1% year-over-year to $0.05 for the fiscal year that ended December 2022. Moreover, the company missed its consensus estimates in all four trailing quarters, which is disappointing.

The stock has plunged 14.1% over the past six months and 42.7% in the past year to close the last trading session at $7.95.

PLTR’s poor fundamentals are apparent in its POWR Ratings. The stock has an overall rating of D, equating to Sell in our proprietary rating system.

PLTR has an F grade for Sentiment and a D for Value and Stability. Within the same industry, it is ranked #21.

Click here to see PLTR’s ratings for Quality, Growth, and Momentum.

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INFA shares were trading at $18.64 per share on Friday afternoon, up $0.06 (+0.32%). Year-to-date, INFA has gained 14.43%, versus a 6.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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