This past year has brought so many changes. The corona pandemic has been the driving force, impacting pretty much every facet of our lives. For many of us, the COVID crisis has pushed work online.
The coronavirus pandemic and its effects on the workplace are likely to stay with us, no matter what else happens. The shift of white-collar work to the digital realm, with online offices and virtual workspaces, has been too big to turn back, and its ride-along effects have made a profound impact on both companies and office workers. Working remote has increased flexibility, mobility, and independence for both workers and employers, and neither side is likely to want to give that up completely.
All of this makes business software, especially cloud-based SaaS (software as a service) offerings, more valuable than ever. Cloud software provides a wealth of services that remote businesses cannot do without – security, networking, customer management, to name a few – and has made it possible to streamline the shift to remote work. As a result, Software-as-a-Service companies have seen their stock hit a premium, and attract attention from some of Wall Street’s top analysts.
With this mind, we’ve used the TipRanks database to pinpoint three SaaS stocks that match a profile: they all earn Moderate or Strong Buy consensus ratings from the analyst community, and boast double-digit upside potential. A dive into the details will tell us what else makes them so compelling for investors.
We’ll start with a content management and file sharing company, Box Inc. This company got its start back in 2005, and now offers enterprise customers a cloud-based platform for business processes, content management, and workplace collaboration. Box’s products include content overview, security and compliance, and IT controls.
Box’s revenues have been climbing gradually for the past two years, and that pattern continued through the corona crisis. The most recent quarterly report, for 3Q20, showed $196 million at the top line, for an 11% year-over-year gain. The company’s cash position is solid, with net cash from operations reaching $45.1 million, up a whopping 407% yoy.
The company was confident enough, from its revenues and liquidity, to earlier this month announce a $315 million issue of convertible senior notes, due in 2026. Box expects to raise in excess of $300 million from the issue, and will use the funds for debt reduction and general corporate purposes.
Covering this stock for Craig-Hallum, analyst Chad Bennett writes, “[We] like BOX as a moderate revenue re-acceleration and more
meaningful operating margin expansion story. The company is quickly
moving up rungs on the ‘rule-of-x’ ladder in its pursuit of 40%+ revenue
growth plus free cash flow margin. At ~3.8x EV/sales and just above 20x
EV/EBIT and P/E, BOX is one of the cheapest names in software and has
plenty of room to appropriately re-rate higher as it moves up this ladder.
Looking at our software comp table, we find a select amount of companies
in this multiple range that are growing north of 10%, which we think BOX
To this end, Bennett rates BOX shares a Buy along with a $28 price target. This figure indicates his confidence in a one-year upside of 57%.
Overall, Box gets a Moderate Buy rating from the analyst consensus. The stock has received 7 reviews in recent weeks, breaking down to 5 Buys and 2 Holds. Shares are priced at $17.69 and the $23.17 average price target indicates a 29% one-year upside from that level.
Salesforce is a well-known name in cloud software, as the company was an early leader in the CRM niche – in fact, it took its ticker from its Customer Relationship Management products. Salesforce’s cloud-based software products provide solutions for the customer-facing issues businesses face: tracking sales and commerce, managing databases, customer service, market analytics. A major selling point is scalability; Salesforce software can work with companies of all sizes.
In the latter half of 2019, Salesforce predicted that it would double its $138 billion market cap by 2024. So far, the company is well on its way to realizing that goal – the market cap has increased by 50% since then. In making those gains, Salesforce stock has bounced back strongly from its ‘corona recession’ low point reached last March
Strong revenue growth has gone hand-in-hand with the share gains. In 3Q20, CRM showed $5.42 billion in total revenues, up 20% year-over-year. EPS came in at $1.15, well above the 75 cents expected. The company described the quarter as ‘another record,’ and raised its FY21 guidance to $21.1 billion and set the FY22 guidance at $25.5 billion.
In addition to the strong financial results, there are two other points of note here. First, Salesforce announced that it intends to purchase Slack, the work communication app, for $27.7 billion. And second, Salesforce was added to the Dow Jones Industrial Average.
Kash Rangan, 5-star analyst with Goldman Sachs, covers Salesforce, and he is impressed. Noting that the business cloud software market is a trillion-dollar field, Rangan says, “Salesforce remains poised to be one of the most strategic application software companies in the cloud industry. In spite of its size at about $25B estimated revenues in FY22, the company’s current revenue performance obligation is organically growing in the high teens.”
That growth underlies Rangan’s Buy rating and $315 price target. At current levels, his target implies an upside of 39% on the one-year horizon.
How does Rangan’s bullish bet weigh in against the Street? It appears the Goldman Sachs analyst is not the only one enthusiastic on this software giant’s prospects, with TipRanks analytics demonstrating CRM as a Strong Buy. Out of 28 analysts polled in the last 3 months, 21 say Buy, while 7 suggest Hold. With a return potential of nearly 21%, the stock’s consensus target price stands at $275.44
Splunk, Inc. (SPLK)
Last but not least we have Splunk, which offers a variety of business services on the cloud. The flagship product is data-to-everything, a single, scalable platform for investigating, monitoring, analyzing, and acting on data. Splunk’s production interfaces are browser style, intuitive, and easy to learn, making it simple for customers to collate and use the collected aggregated information in their databases.
The most recent quarterly report, for Q3 of last year, showed $558 million at the top line, down 10.8% yoy, but up 13% sequentially. This result was below the Wall Street estimates, which had expected revenues of $613 million. Drilling down into the quarterly data, we find that Splunk reported $145 million in cloud revenues, for an 80% yoy gain, and signed 444 new enterprise customers during the quarter. In another bright spot, recurring revenue also showed strong growth, with cloud ARR, at $630 million, up 71% from the year-ago quarter. Overall, the company saw annual recurring revenue grow by 44% since last year.
Needham’s 5-star analyst Jack Andrews reviewed Splunk, and despite the recent quarterly miss, he sees strong reason to believe in the company.
“In our view, Splunk represents one of the few open-ended growth stories in technology, since the more customers use the company’s software, the more those customers want to use it. We view Splunk as an industry leader with strong products attacking a huge market opportunity,” Andrews opined.
Andrews rates the stock as a Buy, and his $275 price target indicates a possible growth of 59% for the year ahead.
Overall, there are 28 recent reviews on record for Splunk, with a breakdown of 18 Buys and 10 Holds giving the stock a Moderate Buy analyst consensus rating. The shares have an average price target of $206.35, suggesting ~23% upside from the trading price of $167.66.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.