3 Top Software-as-a-Service (SaaS) Stocks to Buy Today
Few sectors of the economy have performed better over the past three years than software-as-a-service (SaaS). The PowerShares Dynamic Software ETF -- which invests primarily in SaaS companies -- has doubled in that time frame, while the broader market is up just 40%.
This shouldn't be terribly surprising: The business model is an investor's dream:
- Once up-front investments are spent to write mission-critical software and hire a sales force, it costs next to nothing to service each additional customer.
- There are high switching costs associated with software, locking customers in for the long haul.
- Up-selling on new products becomes much easier and requires much less spend on sales.
And yet there are some who understandably think SaaS stocks may be in bubble territory. While I'm not arguing some such stocks are expensive, the three I'm covering today -- pharmaceutical cloud player Veeva Systems (NYSE: VEEV), body camera specialist Axon Enterprises (NASDAQ: AAXN), and programmatic ad-buying company The Trade Desk (NASDAQ: TTD) -- still have lots of room to grow.
Building the cloud for pharmaceuticals (and more)
We'll start with Veeva Systems. The company was founded by Peter Gassner after he realized -- as an executive at Salesforce.com -- that the pharmaceutical industry had very specific cloud-based needs that no one was meeting. Much of this was due to the heavy regulation the industry deals with.
He started by offering up commercial cloud tools. These tools helped the sales forces of drug companies manage their clients. But five years ago, Veeva came out with its killer product: Vault. This end-to-end solution is a one-stop shop for everything a drug company needs to take a compound to market.
Today, there are 17 different Vault applications available. And as you can see, growth at Vault has been impressive.
Management expects Vault to continue to grow at 40% for the rest of the year, which is kind of crazy when you consider its size.
Currently, the company trades for 60 times free cash flow and is valued at over $23 billion. Neither of those makes Veeva seem like a great deal, but consider the three growth drivers still present: the option to add to Vault's applications, the release of Nitro -- a database warehouse -- and the company's push into other heavily regulated industries outside of pharmaceuticals.
Monopolies in two different industries
Next up is Axon Enterprise. The company -- formerly known as TASER International -- is the 800-pound gorilla in two police-focused niches: stun guns and body cameras.
Right now, the hardware that Axon sells -- the stun guns, consumables for the stun guns, and body cameras -- bring in the bulk of sales. But the real story is the SaaS angle: Police departments have to purchase a "seat" on Evidence.com for every officer that loads his/her body footage onto the cloud. These seats cost anywhere from $15 to $79 per month.
Axon has had no problem attracting accounts to the SaaS service.
Here's the real kicker: These seats are likely locked in for the long haul. Footage stored on Evidence.com represents vital data for police and the courts they serve. The company's artificial intelligence (AI) allows for footage to be searched just as you could for text -- making it very useful. There's very little chance a police department would risk losing all of that to find a cheaper service.
While the company trades for 100 times trailing non-GAAP earnings, it is valued at just $4 billion. That high price tag is due to the company's decision to offer deep discounts to get police departments in the ecosystem for the long term.
There are a few huge catalysts that could send the stock far higher in the coming years. The release of an AI-enabled Records Management System and a move to include firefighters and paramedics as an addressable market are the two largest of note.
The enabler of programmatic advertising
Finally, we have The Trade Desk. The company has created a tool that allows just about anyone to place a digital ad and have it land in front of the right eyeballs. The shift from traditional media (think: magazines, broadcast TV, and radio) toward digital media (think: ads on YouTube, Pandora, or on websites) is a massive one, and The Trade Desk is capturing an ever larger swath.
Because the company's platform has become the go-to location to buy and place such ads -- and because its Koa AI-based system can execute 9 million queries per second -- it benefits from enormous network effects. The more ads that are placed, the more data the company can collect and the better it can offer up even more specifically targeted ads.
How big is this shift, and how much of that opportunity is The Trade Desk capturing? One way to answer that question is to simply look at the total amount of money (to buy an ad, as well as a fee for access to The Trade Desk's platform and data) spent placing ads on the platform.
This trend is just getting started, as fellow Fool Danny Vena highlighted recently. So, while The Trade Desk might, er, trade for over 80 times non-GAAP earnings, the bigger thing to focus on is that its market cap is just $10 billion -- meaning there's still lots of room for this mid cap to grow.
I've got my skin in the game
Lest you think these are empty headlines, Veeva and Axon already account for 14% of my family's invested holdings. I am strongly considering starting a position in The Trade Desk for the reasons mentioned above.
But if you buy in, take your time. As I mentioned, these stocks have done very well, and have high expectations built into them. By buying small portions and adding to them over time, you can get good prices while giving yourself an opportunity to learn more about each business.
10 stocks we like better than Axon EnterpriseWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Axon Enterprise wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 1, 2019
Brian Stoffel owns shares of Axon Enterprise and Veeva Systems. The Motley Fool owns shares of and recommends Axon Enterprise, The Trade Desk, and Veeva Systems. The Motley Fool has a disclosure policy.