The progressively increasing integration of Artificial Intelligence (AI) and various cloud-based applications within business operations illuminates a path of robust growth for the Software-as-a-Service (SaaS) industry.
Therefore, investing in fundamentally strong SaaS stocks Consensus Cloud Solutions, Inc. (CCSI), DocuSign, Inc. (DOCU), and Vimeo, Inc. (VMEO) could be wise now. However, before delving into the fundamentals of these stocks, it is vital to understand the dynamics of the SaaS industry.
SaaS has played a pivotal role in transforming the business software landscape, fundamentally altering the deployment and utilization of advanced applications for businesses. Companies increasingly recognize the potential of hybrid and public cloud solutions, integrating them to enhance overall operational performance.
Within the broad cloud computing arena, SaaS is the principal delivery model for multiple enterprise applications. SaaS solutions provide attractive benefits like reliable performance, universal accessibility, and cost-effectiveness, making them a popular choice for many businesses. Statista projects that revenue from SaaS could reach 374.50 billion, growing at a CAGR of 7.7% by 2028.
Furthermore, combining technologies like AI and Machine Learning (ML) into new software products and employing them in the SaaS industry can yield considerable advantages.
According to Gartner’s projections, global software spending will reach $916.24 billion in 2023, reflecting a 12.9% year-over-year increase. The software and IT services segments are slated to witness double-digit growth in 2024, primarily driven by cloud spending.
In light of these encouraging trends, let's look at the fundamentals of the three Software - SAAS stock picks, beginning with number 3.
Stock #3: Consensus Cloud Solutions, Inc. (CCSI)
CCSI and its subsidiaries provide information delivery services with a SaaS platform. It serves the healthcare, government, financial services, law, and education industries.
On August 10, 2023, CCSI announced the launch of Clarity Clinical Documentation (Clarity CD). This cost-effective, turnkey solution uses natural language processing and artificial intelligence to extract patient data from unstructured clinical documents, such as faxes, handwritten notes, and scanned files.
The launch of this new solution advances the secure exchange of healthcare data while evolving the role digital faxes play in a health system’s broader interoperability strategy.
CCSI’s trailing-12-month gross profit margin and EBIT margin of 81.98% and 39.73% are 65.9% and 752.9% higher than the industry averages of 49.41% and 4.66%, respectively. Its trailing-12-month ROTA of 10.31% is significantly higher than the industry average of 0.03%.
In the fiscal second quarter ended June 30, 2023, CCSI’s revenues increased 1.8% year-over-year to $92.79 million. Its non-GAAP net income and earnings per share stood at $26.73 million and $1.36, respectively. Its adjusted EBITDA came at $47.67 million.
For the six months that ended June 30, 2023, CCSI’s cash and cash equivalents came at $111.98 million, up 46.8% year-over-year. As of June 30, 2023, its total current assets stood at $155.83 million, compared to $136.53 million as of December 31, 2022.
In the fiscal year 2023, the company expects revenue ranging from $370 million to $390 million, adjusted EBITDA between $192 million and $206 million, and adjusted non-GAAP earnings per diluted share in the range of $4.93 to $5.20. This guidance underscores the company’s commitment to achieving its financial goals in the specified range for the year.
Analysts expect CCSI’s revenue to increase 3.2% year-over-year to $374.17 million in the year ending December 2023, while EPS is expected to come at $5.03.
The stock has declined 2% intraday to close the last trading session at $20.41.
CCSI’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating 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.
It has an A grade for Value and a B for Quality. It is ranked #4 among 22 stocks in the B-rated Software - SAAS industry.
Click here to access CCSI’s Growth, Momentum, Stability, and Sentiment ratings.
Stock #2: DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers a DocuSign e-signature solution that enables sending and signing agreements on various devices.
DOCU’s trailing-12-month gross profit margin and EBIT margin of 79.46% and 6.65% are 60.8% and 42.7% higher than the industry averages of 49.41% and 4.66%, respectively.
DOCU's board of directors has authorized an increase of $300 million to its existing stock repurchase program for a total aggregate amount of up to $500 million of the company’s outstanding common stock.
DOCU’s total revenue rose 10.5% year-over-year to $687.69 million in the fiscal second quarter that ended July 31, 2023. Its non-GAAP gross profit increased 11.3% from the prior-year quarter to $565.79 million. Moreover, its non-GAAP net income rose 66% year-over-year to $149.62 million, while non-GAAP net income per share came at $0.72, representing an increase of 63.6% year-over-year.
Street expects DOCU’s revenues and EPS to increase 6.9% and 11% year-over-year to $690.18 million and $0.63, respectively, in the fiscal third quarter ending October 2023. It surpassed the EPS and revenue estimates in each of the trailing four quarters, which is impressive.
Shares of DOCU declined 1.1% intraday to close the last trading session at $38.53.
DOCU’s POWR Ratings reflect robust prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value and Quality. DOCU is ranked #3 in the same industry.
To access DOCU’s Momentum, Stability, and Sentiment ratings, click here.
Stock #1: Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
VMEO’s trailing-12-month gross profit margin of 77.05% is 57.6% higher than the industry average of 48.9%. Its trailing-12-month asset turnover ratio of 0.70x is 45% higher than the industry of 0.48x.
For the second quarter ended June 30, 2023, VMEO reported revenue of $101.84 million. Its gross profit stood at $78.99 million. Its net earnings came at $5.87 million, compared to a net loss of $26.50 million in the prior year quarter. Also, its earnings per share came in at $0.03, compared to a loss per share of $0.16 in the year-ago quarter.
The company is optimistic about achieving its goal of returning to bookings growth by year-end while focusing on non-GAAP profitability. In the third quarter of 2023, VMEO anticipates revenue slightly above $100 million and adjusted EBITDA of around $2 million. For the fiscal year 2023, the company expects adjusted EBITDA ranging from $10 to $15 million.
VMEO’s EPS is expected to rise 85.9% in the fiscal year ending December 2023, while its revenue is expected to come to $409.43 million. Also, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
The stock has declined marginally over the past five days to close the last trading session at $3.03.
It’s no surprise that VMEO has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has a B grade for Value, Sentiment and Quality. It is ranked first within the same industry.
Beyond what is stated above, we’ve also rated VMEO for Growth, Momentum, and Stability. Get all VMEO ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
DOCU shares were trading at $38.56 per share on Monday morning, up $0.03 (+0.08%). Year-to-date, DOCU has declined -30.42%, versus a 9.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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