19 Feb SaaS Stocks Prove to Be Winners as Business World Moves to the Cloud
Singapore approved the Moderna (NASDAQ: MRNA) vaccine last week, marking another key milestone for the biotechnology company.
But Moderna was not the only company that deserves some credit.
The biotech firm had a huge helping hand from Veeva Systems (NASDAQ: VEEV), a software-as-a-service (SaaS) provider.
As the pandemic spread around the world, consumers turned to online video solutions such as Zoom (NASDAQ: ZM) to communicate.
Moderna, on the other hand, had to turn to business-based, online solutions by Veeva to conduct a clinical study involving over 30,000 participants in collaboration with multiple regulatory and government agencies.
Either way, cloud-based solutions are becoming more important in our daily lives, be it for personal or business use.
The original SaaS trailblazer
Before cloud computing arrived, traditional enterprise software was hard to deploy and costly to maintain.
Applications had to be installed by location. To do that, companies had to invest heavily in IT infrastructure, networks and software licenses. The implementation was also complex and could take as much as 18 months, according to an example cited by the Harvard Business Review.
And that’s not all.
There is also the high cost of maintaining the on-premise system. Enterprises had to hire teams of IT staff and consultants to integrate, support, and upgrade the on-premise applications.
Enter Marc Benioff, the founder and CEO of Salesforce (NYSE: CRM).
In 1999, Benioff founded Salesforce based on two big ideas: software should be delivered over the internet, and the service will be subscription-based.
Salesforce’s software is delivered over the internet, making its service easier to deploy and scale. The company’s subscription model removed most of the upfront cost associated with the traditional way of software deployment.
Armed with these advantages, Salesforce set its sights on the customer relationship management (CRM) market, where the problems associated with traditional enterprise software were the most acute.
The lower installation cost also allowed the company to target small and medium businesses. From there, Salesforce would gradually move upstream to take on larger enterprises.
And the rest, as they say, is history.
With an annual revenue base of over US$20 billion today, Salesforce is valued at close to US$220 billion.
Investors during the company’s IPO in 2004 would have made close to 90 times their original investment.
As Salesforce grew, the broader SaaS industry also came into its own.
The SaaS proliferation
The SaaS ecosystem has grown by leaps and bounds over the last two decades.
According to a recent report by OKTA (NASDAQ: OKTA), an identity management platform, smaller companies use as many as 73 apps on average. Larger OKTA clients deploy more than two times this number, averaging at 175 apps for 2020.
Applications delivered over the cloud have rapidly proliferated into multiple business functions.
Examples range from Workday (NASDAQ: W) for human resource management, Blackline (NASDAQ: BL) to automate key accounting processes, Coupa Software (NASDAQ: COUP) for managing business spend, Microsoft Dynamics 365 (NASDAQ: MSFT) for enterprise resource planning and many more.
As the industry matures, new trends in the SaaS space are emerging.
Larger SaaS companies such as Salesforce have turned into a platform in its own right, hosting over 5,000 apps on its AppExchange.
Meanwhile, others have turned their focus to industry-specific applications.
Emerging SaaS trends
Salesforce’s CRM solutions are considered to be a horizontal SaaS application, designed to be broad-based, and applicable for any industry.
On the other side, some SaaS companies have opted to tailor their solutions for different industry verticals.
For instance, Veeva’s solutions are customised for the life sciences industry. AppFolio (NASDAQ: APPF), on the other hand, serves the property rental space while Mindbody’s solutions are catered for the wellness sector.
Focusing on vertical solutions has proven to be profitable.
Veeva Systems went public in 2013, and its shares have gained almost 15 times in around seven years.
Likewise, AppFolio’s share price, which started trading in 2015, is up over 13 times from its IPO. Mindbody, on the other hand, was taken private in 2018 at a valuation of US$1.9 billion.
Meanwhile, as more SaaS apps come online, managing the sheer volume of cloud software solutions is becoming a problem.
To tackle the rising complexity, OKTA’s identity access management (IAM) solution helps companies organise the access and authorisation of different apps for each individual.
Demand for OKTA’s solutions rises as the volume and complexity of cloud solutions increase. Shares of the IAM platform provider are already up almost 17 times since its IPO in 2017.
Along came a pandemic
The COVID-19 pandemic has increased the urgency to move business processes online.
In many ways, SaaS applications are tailor-made for the pandemic where more and more processes have to be moved online to keep businesses running.
In addition, with an increasing number of employees working from home, business software will have to be accessible wherever they are in the world.
Again, SaaS is up for the task here.
As such, it is no surprise that more than two-thirds of SaaS companies either experienced limited impact or witnessed accelerated growth between March 2020 and May 2020, according to a report by subscription economy evangelist, Zuora (NASDAQ: ZUO).
Looking ahead, research firm Gartner estimates that worldwide IT spending will grow from US$3.7 trillion in 2020 to over US$4.1 trillion in 2022.
In particular, the enterprise software segment is expected to see spending increase from US$465 billion to over US$557 billion in 2022.
The large addressable market suggests that there is plenty of room for growth.
Get Smart: The pros outweigh the cons
It’s not all plain sailing ahead, of course.
As cloud applications become more connected, companies have become more vulnerable to cyber espionage.
The well-publicised case of the Solar Winds hacking may have left information from as many as 17,000 companies exposed, serving as a timely reminder that there are risks involved.
In addition, SaaS solutions are bought for and paid for by businesses.
If the world’s economy heads south, business revenue may be crimped, leading to cost cuts and less money to go around for enterprise software.
But when it is all said and down, we think that the tailwinds will far outweigh the potential headwinds.
In all likelihood, the SaaS industry, armed with its inherent advantages, should be far larger than where it is today by the time 2030 comes along.
As investors, we want to be part of this long and profitable journey.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares in Zoom, OKTA, Salesforce, Microsoft, Veeva, and AppFolio.