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Will Enterprise SaaS stocks remain market leaders in 2020? ...

Ved Prakash, Newsblare
0 Comments| January 27, 2020

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Will Enterprise SaaS stocks remain market leaders in 2020? Here are some insights from an industry expert.

Investors are eager to invest in businesses that are reputable and are more likely to grow in the future. The Enterprise SaaS (Software as a Service) domain is emerging as one of the fastest-growing industries poised for sustained revenue growth in the future. Factors such as profitability and competitive advantage are also important which line up very favorably for Enterprise SaaS companies.

Kshitij Saxena, a product lead at Microsoft who has successfully launched and grown multiple Enterprise SaaS technology products such as the Edge mobile browser for enterprises explains, “In a nutshell, enterprise SaaS companies rent out software to be used by other companies or organizations that need it to efficiently run their various business activities”.

This makes it a cheap and flexible option for organizations wanting to enable efficiencies through software, therefore making it a much lucrative model. “A company used to have to invest large sums of money to buy packaged software and then pay more down the line to maintain it, but now with the SaaS model both the upfront and maintenance costs are gone making it cheaper resulting in high demand,” he says.

This increase in demand is responsible for the growth in the SaaS market. It has continued to grow ever since the cloud-powered services entered the tech sector. According to a report published by Gartner, the net worth of the industry reached USD 85 billion in 2019, which is estimated to grow 17.8% from last year.

Gartner forecasts that by 2021, global cloud service revenues are set to grow from $175.8 billion in 2018 to reach $278.3 billion, off the back of accelerated customer-oriented growth strategies and increased adoption. SaaS is projected to remain the largest segment of the cloud services market, with revenues projected to grow 17.8% in 2019 (from $72.2 billion in 2018) to reach $85.1 billion.

In addition to the market itself growing at a consistent rate for Enterprise SaaS products, there are other unique aspects that position them to be a highly lucrative business. “Increase in the overall market is just a validation that there is a growing demand for such an offering but there are unique additional aspects that make this a great business” adds Saxena.

  1. High revenue growth (e.g. ADBE) - Enterprise SaaS companies revenues have had high growth and will continue to do so primarily due to the lower total cost and flexibility which allows more enterprises to use the software. “Instead of a one time purchase of packaged software, organizations can buy it as a service for a fraction of the cost as a subscription which lowers the barrier to try it out and more organizations are willing to try it out,'' says Saxena.
  2. Recurring revenue - Since the business model is equivalent to renting out software, the revenue stream stays consistent on a monthly or annual basis. “A constant stream of revenue is a very lucrative business model and the subscription model enables exactly that compared to a one time sale of packaged software which needs constant investment in finding new customers,” he points out.
  3. Low cost and ease of onboarding for customers - The cost of trying out the SaaS is extremely low, in fact, most companies offer trials for free which allows customers to see the value before making a financial commitment which makes for easy acquisition of new customers. “Free trials are one of the most effective ways of getting new customers because it defers the financial commitment from organizations (customers) to after they have seen the value of the product. This allows even a small team in the organization to try out the software without approval from executives. This model is one of the reasons why products like Hubspot (HUBS) and Jira (TEAM) are so successful in the enterprise,” he explains.
  4. High margins (e.g. CRM) - Software businesses are high margin business in general but what makes SaaS businesses special is the ability to constantly make the product better through cloud updates while millions of customers continue to use it instead of having to invest heavily in the next version of the product to differentiate it enough that the customers buy the new version. This tends to keep margins high. Moreover, subscription fees aren’t the only way to add SaaS revenue. There are opportunities for incremental revenue with minimal cost, he explains. A few that he mentions are -
  • Charging for hands-on deployment for large enterprises
  • Custom integration fees
  • Premium support charges
  1. Low customer churn - Organizations typically avoid change in software due to the potential disruption in operations unless they are not getting what they expect from the solution. This result is customers using the product to stick with it unless there is a really good reason and therefore leads to a low churn rate. “The larger the customer, the lower the likelihood to switch and therefore lower the expected churn rate” Saxena adds.

Enterprise SaaS is a highly lucrative business with the fastest-growing revenue model, and investors are always looking for such big shifts. They love businesses that have a reputation for growth and profitability. This is why enterprise SaaS companies have lately received considerably high funding from venture capital firms even in their infancy.

A great example of this is, Databricks is the leader of unified data analytics, which has raised $400 million in funds to continue its market-leading growth. This Series F round, led by Andreessen Horowitz's Late Stage Venture Fund, aims to accelerate innovation and scale worldwide, and Databricks is valued at $ 6.2 billion.

Another major funding in the last year was $280 Million raised by Workfront, a leading work management application platform from existing equity holders W Capital Partners, Susquehanna Growth Equity, and AB Private Credit Investors.

In 2019, major enterprise SaaS stocks such as MSFT, ADBE, CRM, and TEAM have outperformed the typically favored FAANG stocks by a decent margin, despite the overall market presenting volatility with a significant dip in Q4.

This 2019 momentum for enterprise SaaS stocks is expected to continue in 2020 for the reasons we listed above.

The Microsoft Corporation MSFT share price is estimated to be around 199.325 USD in the next one year and 323.699 USD in the next five years. Meaning, if you are investing $100 in this stock, then in the next five years the investment can be up to 193.91. Not bad, it's almost 100% return.

Similarly, the stock price of Adobe Systems Incorporated forecast 678.978 USD by January 2025, with 5 years of investment, revenue is expected to be around 94.98%. And Inc stock price forecast 338.967 USD by January 2025, and revenue is expected to be around 83.26% with 5 years investment.

Major enterprise SaaS stocks such as MSFT, ADBE, CRM, TEAM, etc. all are long-term and profitable investment options for investors.

Moreover, smaller privately held enterprise SaaS startups looking to go public also benefit from (this momentum) bullish trends of listed enterprise SaaS stocks. That would help these startups become a lucrative option for investors too as they look for investment opportunities with greater upside.

Bottom line

2019 was a fantastic year for many Enterprise Software stocks.

Meaning regression is always latent and extreme volatility should be expected for any small growth company. But I believe that 2020 is a great year to start or add these positions keeping in mind the long-term horizon.

So this year the SaaS industry is projected to expand in a big way.

While nothing is certain in the short-term, especially on an individual company basis, I am confident that SaaS enterprises will do very well in the five-year timeframe and beyond.

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