The demand for cloud-based applications, which facilitate remote working, has grown significantly, especially since the beginning of the COVID-19 pandemic. And amid the rapid, ongoing, global digitization, the need for software-as-a-service (SaaS) solutions is expected to be accelerated further. According to a Research and Market report, the global software-as-a-service (SaaS) market is expected to reach $436.90 billion in 2025, growing at a 12.5% CAGR.
However, as the SaaS industry grows, the risk of being exposed to cyber threats is a growing concern. Organizations are often subject to cyberattacks because they have crucial data on the cloud, which is under threat from malware and ransomware. Furthermore, the SaaS space also seems crowded, with several companies vying for a market share in the growing industry.
Against this backdrop, we think it could be wise to avoid fundamentally weak popular SaaS stocks Twilio Inc. (TWLO), Okta, Inc. (OKTA), and Fastly, Inc. (FSLY). Their prices appear to have gotten ahead of their intrinsic values and we think the companies have bleak growth prospects.
Twilio Inc. (TWLO)
TWLO in San Francisco, provides a cloud communications platform that enables developers to build, scale and operate real-time communications within software applications. The company offers a customer engagement platform with software designed to address specific use cases, such as account security and contract centers and a set of Application Programming Interfaces.
TWLO’s dollar-based net expansion rate for its fiscal third quarter, ended September 30, 2021, came in at 131%, versus 137% in the year-ago period. Its operating expenses increased 74% year-over-year to $596.96 million, while its net loss increased 91.7% to $224.10 million. Also, its non-GAAP EPS decreased 75% year-over-year to $0.01.
In terms of forward EV/S and EV/EBITDA, TWLO’s respective 17.41x and 195.53x are higher than the 4.17x and 16.41x industry averages. Analysts expect TWLO’s EPS for the quarter ending December 31, 2021, to decline 650% year-over-year to $0.22. Over the past nine months, the stock has lost 27.1% to close yesterday’s trading session at $286.15.
TWLO’s weak fundamentals are reflected in its POWR Ratings. It has an overall D rating, which equates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Okta, Inc. (OKTA)
A San Francisco-based independent provider enterprise identity management, OKTA’s Identity Cloud platform provides identity management solutions that enable customers to secure their users and connect them to technology and applications. It allows access to various cloud applications, websites, mobile apps, and services from multiple devices.
For its fiscal second quarter, ended July 31, 2021, OKTA’s non-GAAP operating loss came in at $25 million, versus $6 million in non-GAAP operating income in the year-ago period. Its non-GAAP net loss came in at $16 million compared to non-GAAP net income of $10 million in the prior-year period. Also, its free cash flow was negative $4 million, compared to $7 million in the year-ago period.
OKTA’s forward EV/S and P/S of 27.29x and 26.68x, respectively, are higher than the 4.17x and 4.01x industry averages. Its EPS for this year is expected to decline 772.7% year-over-year to $0.74. Over the past three months, the stock has declined 18.7% in price to close yesterday’s trading session at $215.23.
OKTA’s POWR Ratings reflect this weak outlook. It has an overall D rating of D, which translates to a Sell in our proprietary rating system. It has a D grade for Value and Stability. It is ranked #49 of 59 stocks in the Software – Business industry. To check the additional ratings of OKTA for Growth, Momentum, Sentiment, and Quality, click here.
Fastly, Inc. (FSLY)
FSLY provides services in delivery, security, streaming media, e-commerce, and private CDN. The user can manage traffic spikes and mitigate security threats with the help of its solutions. In addition, the San Francisco-based concern works with Google Cloud Platform to extend the user’s infrastructure and application logic for content delivery, backend workload, infrastructure costs, and scalability.
On June 8, major websites, including Reddit and the New York Times, were affected by a massive internet outage due to technical issues faced by FSLY. Speculation about the company falling victim to a cyberattack spread like wildfire, highlighting the growing problem related to cybersecurity.
FSLY’s non-GAAP net loss for its fiscal third quarter, ended September 30, 2021, increased 225% year-over-year to $13 million. The company’s operating expenses increased 53.8% year-over-year to $100 million. Also, its operating loss increased 139.1% year-over-year to $55 million.
In terms of forward EV/S and P/S, FSLY’s 13.83x and 13.72x, respectively, are higher than the 4.17x and 4.01x industry averages. Analysts expect FSLY’s EPS for its fiscal year 2021 to decline 200% year-over-year to $0.54. The stock has declined 53.3% in price so far this year to close yesterday’s trading session at $40.76.
FSLY’s weak fundamentals are reflected in its POWR Ratings. According to our proprietary rating system, it has an overall rating of F, which equates to a Strong Sell. It also has an F grade for Quality and a D grade for Value and Stability.
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TWLO shares were trading at $277.00 per share on Wednesday morning, down $9.15 (-3.20%). Year-to-date, TWLO has declined -18.17%, versus a 24.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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