Over the last 5 years, the technology sector has significantly outperformed the S&P 500. This is evident by the Technology Select Sector SPDR ETF’s (XLK) 232% gain, compared to the S&P 500’s 105% gain.
In the corporate world, technology has become integral to all types of operations, such as sales, marketing, supply chain management, customer service, manufacturing, etc. So, it’s not surprising that among the technology sector, SaaS (Software as a Service) stocks have been among the best performers. These stocks are also attractive to investors because they tend to have high margins, double-digit revenue growth, impressive rates of customer retention, and opportunities to help businesses solve problems or increase revenue with new products and features.
Further, once a company starts using a SaaS product, they are likely to keep using it for a long period of time as their employees become comfortable with it, their data is stored on it, and they want to avoid the costs and inconvenience of switching. In 2021, many SaaS stocks have underperformed following big gains in 2020, creating an opportunity in select names that continue to grow. 3 SaaS stocks that investors should consider buying are Workday, Inc. (WDAY), Veeva Systems (VEEV), and SAP SE (SAP).
Workday, Inc. (WDAY)
WDAY is a cloud-based, enterprise software company that offers financial management and human resources software. It also provides applications for analytics and reporting, cloud spending, management solutions, and other applications for healthcare, higher education, and professional services.
In the same way that software products have helped companies cut costs and become more efficient with financial management and supply chain management, WDAY does the same for HR systems. As a result, WDAY’s revenues have been continually compounding since the company was started. Even though the company is more than a decade old, it’s still growing revenues at a double-digit clip.
From Q1 of 2013 to Q1 of 2021, its revenue has increased from $275 million to $4.8 billion on a trailing twelve-month basis. Last quarter was its first profitable quarter as the company delivered $0.41 per share in earnings. Equally impressive is that its gross margins have expanded from 55% to 72%.
Another catalyst for WDAY is the increase in remote work which makes its software even more integral for the operations of HR Departments. Thus, it’s not surprising that revenue growth is expected to increase at an 18% rate over the next 5 years, while earnings are expected to grow at an even faster pace. Since its last earnings report, analysts have hiked WDAY’s 2022 and 2023 EPS by 10%.
WDAY’s stock encapsulates what makes SaaS stocks so attractive – above-average growth and massive margins. Over time, this leads to profitable businesses. Thus, It’s not surprising that WDAY has an overall B rating, which equates to a Buy in our POWR Ratings system. The POWR Ratings also evaluates stocks by various components. For Growth, WDAY has an A rating which is consistent with its double-digit growth rate. To see more of WDAY’s POWR Ratings, click here.
Veeva Systems (VEEV)
VEEV provides cloud-based software solutions for healthcare systems. Its offerings include Veeva Commercial Cloud, a suite of software, data, and analytics solutions; and Veeva Vault, a cloud-based enterprise content and data management application for managing commercial functions.
The company has been growing organically as hospitals and providers are increasingly adopting these systems to manage their data and operations. And, the company has also been making acquisitions of companies providing more niche solutions to add more features and premium offerings for customers.
VEEV has been a fantastic long-term winner with a more than 550% gain since its IPO in 2013. Over this time, revenues have gone from $216 million to $1.6 billion and continue to grow at a double-digit rate. EPS has also trended higher from $0.03 per share to $2.67 in earnings per share over the last 12 months. Gross margins have also increased from 58% to 72%.
VEEV’s revenue surged 29% year-over-year to $433.60 million for its fiscal first quarter ended April 30, 2021. Its non-GAAP operating income grew 40% year-over-year to $181.40 million, while its non-GAAP net income increased 40% year-over-year to $146.90 million. VEEV’s non-GAAP EPS came in at $0.91, up 37.9% year-over-year.
Analysts expect VEEV’s EPS and revenue to increase 18.4% and 24.4%, respectively, year-over-year to $3.48 and $1.82 billion in its fiscal year 2022. In addition, it surpassed the Street’s EPS estimates in each of the trailing four quarters. Over the next 5 years, analysts expect revenue to increase at an average rate of 18%.
VEEV’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has an A grade for Quality. This makes sense considering that the company is one of the top healthcare IT companies, and healthcare spending continues to grow at a rate faster than the overall economy. It also has the positives of a cloud stock in terms of raising revenues and growing margins. To see more of VEEV’s POWR Ratings, click here.
SAP SE (SAP)
SAP is a leading company in the enterprise software space and one of the oldest. The company operates through three segments: The applications, technology & services segment, and the SAP Business Network. Over time, SAP has branched out from providing enterprise resource planning software to help companies optimize their inventory, supply chains, and production process to all sorts of operations including analytics, CRM, marketing, business processes, etc.
One reason that investors should consider having SAP in their portfolios is that once companies start using their software, they are unlikely to change, especially as employees get comfortable and dependent on it.
Switching to a new software system would incur huge costs and disruptions as data would have to be transferred and employees would have to be re-trained. Additionally, since SAP is known as one of the top enterprise software companies, corporate managers are less hesitant to spend money on their products.
In SAP’s last quarter, the company reported earnings per share of $2.11, a 50% increase from last year and topping analysts’ expectations by a significant margin. Currently, its cloud business is the company’s largest source of growth and it grew by 17%. As a result of these strong figures, analysts have been hiking earnings estimates.
The company’s revenue is expected to increase 3.9% to $33.8 billion next year. Analysts expect SAP’s EPS to increase by 5.8%. This combination of revenue growth, earnings growth, and margin expansion is likely going to lead to outperformance in the coming years.
SAP’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary ratings system. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s 7.1% gain. To see more of SAP’s POWR Ratings, click here.
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WDAY shares were trading at $267.20 per share on Monday afternoon, down $0.33 (-0.12%). Year-to-date, WDAY has gained 11.51%, versus a 19.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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