3 Software Stocks Analysts Love

This year marked the beginning of the new age for investors and analysts. The unprecedented global coronavirus pandemic has driven unusual stock market behavior. Traditionally, in economic crises, investors are drawn toward low-risk dividend stocks or safe-haven assets like gold, seeking safe places to store value. But this year, amid the pandemic, investors have been less likely to…

follow the typical formula and instead have gone for high-risk tech stocks based on the stocks’ perceived ability to capitalize on the stay-at-home conditions the pandemic has caused.

Although some traditional analysts have characterized this market behavior as a tech bubble because of high valuations some tech stocks have hit, most analysts think otherwise. They concede that these high-growth software-as-a-service (SaaS) stocks often appear overvalued by conventional valuation multiples during their hyper-growth stage but note that not all companies in the hyper-growth stage succeed; they face competition from already established giants that can decelerate their growth, making it difficult for them to meet investors’ expectations. But there those that succeed and can grow by leap and bounds they maintain.

The pandemic has forced people worldwide to depend more on technology, and with that an SaaS way of working has gained huge popularity. The work, learn, shop, and pay from home culture has given rise to major acceleration in cloud computing. Witness Amazon (AMZN) and Zoom Video Communications (ZM), which have seen their stocks surge 85%. But some smaller players too have outperformed even AMZM. Stocks of CrowdStrike Holdings, Inc. (CRWD – Get Rating), BILL.COM HOLDINGS, INC. (BILL – Get Rating), and Five9, Inc. (FIVN – Get Rating) are cases in point, having surged 430%, 296%, and 188%, respectively, since mid-March.

How to analyze a SaaS stock 

The last decade saw the rise of cloud computing as companies put their software on the cloud to make it accessible to subscribers from anywhere on any device that has a stable internet connection. Many cloud-based software companies moved to a subscriptions model, which has three stages of growth:

In the first stage, a SaaS company spends heavily on customer acquisition to attract a large consumer base to its platform.

In the second stage, it tries to retain customers and cross-sell other products or premium subscriptions. In both these stages, it has high revenue growth but generates losses, which they can bear because of their low capital requirements.

In the third stage, it scales up to gain market share organically or through acquisitions and sees rising profits, though its revenue growth slows.

CRWD, BILL, and FIVN are in the first two stages of growth. Analysts are bullish on the stocks because of their high revenue growth rate, recurring revenue, and significant growth potential.

CrowdStrike Holdings, Inc. (CRWD – Get Rating)

CRWD is a cloud-focused cybersecurity firm that protects endpoints using machine learning and artificial intelligence. In this age of digitization, CRWD has immense growth potential. The number of endpoints is growing, from laptops, smartphones, and IoT (internet-of-things) devices currently, to smart cities, drones, and self-driving cars in the future. Cybersecurity Ventures predicts that cybercrime costs will increase at a CAGR of 15% between…

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