As the business world moves from on-premise to cloud-based services, SaaS stocks are becoming increasingly attractive. This shift offers businesses flexibility, scalability, and cost-efficiency, while investors benefit from predictable, recurring revenue streams and high customer retention rates. The accelerated adoption of remote work and digital transformation further boosts the appeal and growth potential of SaaS companies.
Therefore, investors could consider buying fundamentally sound SaaS stocks, Smartsheet Inc. (SMAR), Informatica Inc. (INFA), and DocuSign, Inc. (DOCU) for the digital future.
In recent years, the Software-as-a-Service (SaaS) model has surged in popularity, becoming a prominent force in the technology and business landscape. SaaS has evolved from an option to a vital tool for companies aiming not just to survive but to excel in today's competitive business environment. The global SaaS market is projected to grow at a CAGR of 19.7%, reaching $1.3 trillion by 2030.
Additionally, AI integration in SaaS is transforming industries this year. Vertical SaaS addresses specific sector needs, while data management via DaaS and iPaaS enhances operations and connectivity. This ever-changing SaaS landscape is set for growth and innovation, with the global SaaS market projected to grow at a CAGR of 6.2%, reaching $325.84 billion by 2028.
Given these favorable industry trends, let us deep dive into the fundamentals of the top Software - SAAS stocks, beginning with the third choice:
Stock #3: Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations.
SMAR’s total assets grew at a CAGR of 13.4% over the past three years. Similarly, its revenue grew at a CAGR of 33.9% during the same period.
In terms of the trailing-12-month levered FCF margin, SMAR’s 28.54% is 189.7% higher than the 9.85% industry average. Likewise, its 81.14% trailing-12-month gross profit margin is 64.6% higher than the 49.30% industry average. Additionally, its 0.83x trailing-12-month asset turnover ratio is 32.9% higher than the industry average of 0.62x.
For the first quarter, which ended April 30, 2024, SMAR’s total revenues rose 19.6% year-over-year to $262.98 million. Its non-GAAP operating income came in at $42.09 million, up 84.6% over the prior-year quarter. For the same quarter, the company’s non-GAAP net income rose 77.1% from the year-ago value to $44.36 million. Furthermore, its non-GAAP EPS came in at $0.32, representing an increase of 77.8% year-over-year.
Analysts expect SMAR’s EPS and revenue for the quarter ending July 31, 2024, to increase 83.7% and 16.4% year-over-year to $0.29 and $274.25 million, respectively. It surpassed the Street EPS and revenue estimates in each of the trailing four quarters, which is impressive.
Shares of SMAR have gained 13.3% over the past year to close the last trading session at $44.08.
SMAR’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SMAR has an A grade for Growth and Sentiment and a B for Quality. It is ranked #6 among 19 stocks in the B-rated Software - SAAS industry.
Click here to access the additional SMAR ratings (Momentum, Stability, and Value).
Stock #2: Informatica Inc. (INFA)
INFA develops an artificial intelligence-powered platform that connects, manages, and unifies data across multi-cloud, hybrid systems at enterprise scale in the United States.
On June 10, 2024, INFA announced new product innovations and an enterprise-grade Generative AI blueprint for Databricks, including full Unity Catalog support for its Intelligent Data Management Cloud platform. INFA also introduced native Databricks SQL ELT support and a free Data Integration Service via Databricks Partner Connect.
On June 4, 2024, INFA announced new generative AI and Snowflake native app offerings, including Native SQL ELT support for Cortex AI Functions, Enterprise Data Integrator (EDI), and Cloud Data Access Management (CDAM) for Snowflake. These enhancements aim to streamline data integration and governance on the Snowflake AI Data Cloud.
INFA’s revenue grew at a CAGR of 6.3% over the past three years, and its EBIT grew at a CAGR of 16.5% during the same period.
In terms of the trailing-12-month EBIT margin, INFA’s 6.40% is 35.9% higher than the 4.71% industry average. Its 15.70% trailing-12-month EBITDA margin is 60.9% higher than the industry average of 9.76%. Also, its 79.72% trailing-12-month gross profit margin is 61.7% higher than the industry average of 49.30%.
INFA’s total revenues for the fiscal first quarter that ended March 31, 2024, increased 6.3% year-over-year to $388.61 million. Its non-GAAP net income rose 55.1% from the year-ago quarter to $69.22 million. INFA’s non-GAAP net income per share grew 46.7% year-over-year to $0.22. In addition, its adjusted EBITDA stood at $111.47 million, up 25.2% over the prior-year quarter.
For the quarter ended June 30, 2024, INFA’s EPS is expected to increase 29% year-over-year to $0.22. Its revenue for the same quarter is expected to rise 7.2% year-over-year to $403.10 million. INFA surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
Over the past year, the stock has gained 68.5% to close the last trading session at $30.88.
INFA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
The stock has a B grade for Quality, Growth, and Sentiment. INFA is ranked #5 in the same industry.
Beyond what is stated above, we’ve also rated INFA for Value, Stability, and Momentum. Get all INFA ratings here.
Stock #1: DocuSign, Inc. (DOCU)
DOCU offers electronic signature solutions internationally. The company provides an e-signature solution that enables the sending and signing of agreements, Contract Lifecycle Management that automates workflows, Document Generation streamlines the process of generating new, custom agreements, and more.
Over the past three years, DOCU’s revenue has grown at a CAGR of 20%. Also, the company’s total assets and levered free cash have increased at CAGRs of 8.4% and 19.9%, respectively, over the same period.
On June 4, DOCU announced the upcoming launch of its new Docusign Connector for SAP Ariba solutions, which is a new offering to automate workflows between Docusign CLM and SAP Ariba solutions to help businesses accelerate time to value and eliminate friction in source-to-pay agreement processes.
The new connector will be available globally starting from September. The launch reinforces DOCU’s commitment to its partnership with SAP and its vision to transform agreement processes across the source-to-pay workflow.
On May 31, DOCU acquired Lexion, a leading AI-powered agreement management company. The strategic acquisition strengthens DOCU’s position in Intelligent Agreement Management and introduces new AI-assisted capabilities to the Docusign IAM platform.
For the first quarter that ended April 30, 2024, DOCU’s total revenue increased 7.3% year-over-year to $709.64 million. Its non-GAAP gross profit rose 6.5% from the year-ago value to $582.17 million. The company’s non-GAAP income from operations of $202.09 million indicates growth of 15% from the prior year’s quarter. In addition, the company’s non-GAAP net income came in at $172.84 million and $0.82 per share, up 15.1% and 13.9% from the prior year’s quarter, respectively.
As per the company’s second-quarter 2024 guidance, DOCU expects total revenue between $725 million and $729 million and subscription revenue between $705 million and $709 million. For the full year, the company expects total revenue of $2.92 billion to $2.93 billion and subscription revenue of $2.84 billion to $2.85 billion.
Analysts expect DOCU’s revenue and EPS for the second quarter (ending July 2024) to increase 5.7% and 11.5% year-over-year to $727.19 million and $0.80, respectively. Moreover, the company topped the consensus revenue and EPS estimates in all four trailing quarters.
DOCU’s stock has surged 27.4% over the past nine months and 3.4% over the past year to close the last trading session at $53.50.
DOCU’s POWR Ratings reflect bright prospects. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
DOCU has an A grade for Growth and Quality and a B for Value. It is ranked first in the same industry.
In addition to the POWR Ratings highlighted above, one can access DOCU’s ratings for Momentum, Stability, and Sentiment here.
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DOCU shares were trading at $54.40 per share on Monday morning, up $0.90 (+1.68%). Year-to-date, DOCU has declined -8.49%, versus a 15.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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