My favorite software as a service stocks for 2022
LGone are the days of companies buying software and maybe upgrading it in one, two, or even three years. Now, most software comes in the form of monthly or annual subscriptions. While some people may complain about constant billing, it allows them to use the most recent software version at all times.
The Software as a Service (SaaS) business model grew out of this thinking, and companies that use it often make significant investments. This is due to a reliable source of income, making it possible to optimize the expenses of the software publisher. Here’s why three of my favorite SaaS stocks for 2022 are Shopify (NYSE: SHOP), Veeva Systems (NYSE: VEEV), and Procore (NYSE: PCOR).
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Shopify’s software provides e-commerce websites to its customers. Businesses can subscribe to Shopify’s offering for as little as $ 29 per month. This essential service provides customers with an online presence, a means of processing payments, and search engine optimization (SEO) tools. As a business grows, customers can purchase upgraded tiers to expand internationally and receive lower transaction fees. Shopify also offers point-of-sale (POS) hardware for businesses that want a physical presence.
Shopify has become one of the best ecommerce options for aspiring merchants and established businesses. It processed $ 400 billion in gross merchandise volume (GMV) over the life of the business and processed the second largest GMV of any e-commerce platform in the United States in 2020. The figure Shopify’s third-quarter business was $ 1.12 billion, up 46% from a year ago.
Shopify derives its revenue from two main sources, subscription solutions and merchant solutions. Monthly subscriptions that businesses pay for the Shopify service increased 37% to $ 336 million. Merchant solutions, or the revenue generated from every item sold on the Shopify platform, is a larger part of Shopify’s revenue stream. It rose 51% to $ 788 million due to the $ 41.8 billion GMV processing.
The e-commerce market is huge; Shopify believes it has a total addressable market of $ 153 billion for small businesses alone. Shopify is expected to capture a large chunk of the market and will be a successful investment if it hits its lofty goals.
In the life sciences industry, strict regulations come into play for bringing new products to market. Veeva Systems helps businesses manage these complex workloads by providing a single point of truth through its vault product. It also adds a customer relationship management (CRM) segment, allowing field sales teams to have the most relevant data when closing a transaction.
Unlike many SaaS companies, Veeva is very profitable. In the third quarter ending October 31, it produced 31% more GAAP operating income with a 28% margin. When its FY22 data is examined, the operating margin remains the same, but its year-over-year growth has accelerated to 38%. Revenue increased 26% to $ 476 million, indicating that Veeva Systems has reached scale because profits are growing faster than revenues.
Looking ahead, Veeva management projects sales of $ 1.84 billion for FY22 and has released a FY23 forecast of $ 2.16 billion at the midpoint of the two. This represents year-over-year growth rates of 26% and 17%, respectively. As growth slows, Veeva reaches a point where it can reward shareholders by returning excess capital.
At 55 times the price of free cash flow, Veeva Systems doesn’t come cheap.
VEEV data by YCharts
However, Veeva Systems is in the same valuation range it has traded for a long time, giving investors confidence that they can buy today without fear of being burned by extreme price swings.
Construction was one of the last industries to benefit from a digital revolution. It is only recently that technology has enabled workers on a construction site to access the Internet quickly and reliably. Procore’s goal is to connect all the stakeholders of a construction project through its software. It ensures that contractors and subcontractors have accurate information by creating a single source of truth that also connects engineers and architects. Project finances can also be monitored in real time, giving more visibility to the budgeting process.
G2 has recognized Procore as the leader in several software categories, and its quarterly results confirm this. Third quarter revenue increased 30% to $ 132 million and converted $ 6.5 million to free cash flow. Procore’s gross margins sit at a healthy 83%, paving the way for a target operating margin of 20% to 25% when it reaches full profitability years later.
Procore has the least market penetration of the three because it is still deploying its solution globally. France and Germany will be able to use Procore’s software next year as it sets up in Europe.
While Procore went public in 2021, investors haven’t seen a full year of results. With each successive earnings report, investors will gain confidence in Procore’s ability to seize a massive market opportunity.
As the timeline draws closer to 2022, Shopify, Veeva Systems, and Procore are expected to be on investor radar. Each delivered strong results in 2021 and will continue to do so next year. SaaS stocks are known to be volatile, mainly due to high valuations. Investors should be prepared for large price swings, but if they can handle them, the price appreciation of these three growth stocks will likely beat the market.
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Keithen Drury is the owner of Procore Technologies, Inc., Shopify and Veeva Systems. The Motley Fool owns and recommends Procore Technologies, Inc., Shopify, and Veeva Systems. The Motley Fool recommends the following options: $ 1,140 long calls in January 2023 on Shopify and $ 1,160 short calls in January 2023 on Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.