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This story originally appeared on StockNews
The SaaS business model is becoming the norm for the software industry. While many SaaS stocks saw huge gains in 2020, this year we need to be more selective. Which is why David Cohne is recommending Salesforce.com (CRM), Microsoft (MSFT), and Adobe (ADBE) as the top SaaS stocks for May.
Twenty years ago, very few companies employed a software-as-a-service (SaaS) business model. But now, that’s changed, as it’s become widespread in the software industry. SaaS is a type of licensing model where access to software is provided on a subscription basis. The software is located on an external server. Customers access it through a web browser instead of on their computers’ hard drives.
The SaaS business model, for the most part, has become synonymous with the rise of the cloud, as software is accessed through the cloud. Software hosted on the cloud not only provides a time-saving option for companies to update their software but is also less expensive for customers. Previously, consumers would have to buy multiple software products at once, which could get quite costly. The SaaS model, on the other hand, makes it much more cost-effective, especially at the front end.
For a SaaS company, the subscription model provides a steady stream of revenue instead of convincing its customers to upgrade to new products. With so many SaaS companies to pick from, it can be difficult for investors to narrow their choices. That’s why I’ve narrowed down my list to SaaS stocks with solid growth catalysts and Buy ratings in our POWR Ratings service, which is why I am highlighting Salesforce.com Inc (CRM), Microsoft Corp. (MSFT), and Adobe Inc. (ADBE) below.
Salesforce.com Inc (CRM)
CRM is currently the largest Customer Relationship Management vendor globally with a 30% market share in the sales force automation space. Approximately 90% of the Fortune 100 companies use at least one CRM software. The company is well-positioned to continue capturing more of the $130 billion market. CRM is a leader in each of the markets it serves. Its customer retention has been steadily improving over time.
CRM has been a direct beneficiary of the move to the cloud. It is benefiting from increased demand as customers continue to go digital. The rapid adoption of its cloud-based offerings is what is driving demand for its products. CRM has been adding more features to its offerings, including customer service, marketing automation, e-commerce, analytics, and artificial intelligence. And each of them is tightly integrated. Plus, the company has emphasized expanding its margin in recent quarters.
The stock has an overall grade of B, which translates into a Buy in our POWR Ratings system. The company has a Growth Grade of B, which isn’t surprising as revenue is expected to soar 21.5% year over in the current quarter. In addition, earnings are forecasted to rise 25.7% in the same quarter. CRM also has a Quality Grade of B due to its strong balance sheet. The stock has a current ratio of 1.2, which indicates it has more than enough liquidity to handle short-term debt.
We also provide grades on CRM based on Value, Momentum, Stability, and Sentiment. You can find those here. CRM is ranked #12 in the Software – Business industry. You can find other top-ranked stocks in the industry by clicking here.
Microsoft Corp. (MSFT)
MSFT needs no introduction as one of the largest technology providers in the world. The company dominates the PC software market with an 80% market share in operating systems. If you think of buying software fifteen years ago, the first thing that pops into most people’s minds is the CD-ROMs for the Microsoft Office Suite. While Office still dominates, it’s now run on a SaaS model.
The company holds a near-monopoly on productivity software and operating systems. The switch to subscription services provides the company reliable income and improving margins. But the PC market is not the only place where MSFT shines. Its cloud offering, Azure, is the company’s largest and fastest-growing business and a leading player in the space. Its Microsoft Teams offering is also based on a subscription.
MSFT has an overall grade of B or a Buy rating in our POWR Ratings service. It also has a Sentiment Grade of A, which means that Wall Street analysts love the stock. According to the StockNews Price Target feature, thirty-one analysts have a Strong Buy or Buy rating on the stock. MSFT also has a Stability Grade of B, which means its earnings and price performance have been stable.
We also provide the following grades for MSFT: Growth, Value, Momentum, and Quality. You can find those here. MSFT is ranked #18 in the Software – Application industry. You can find other top stocks in that industry by clicking here.
Adobe Inc. (ADBE)
ADBE is one of the largest software companies in the world. It derives the bulk of its revenue from licensing fees from customers. The company dominates the content creation market. It was originally known for its PDF reader and Photoshop, but is now a diversified software company that offers electronic document technology and graphic content authoring applications to creative professionals, designers, developers, and enterprises.
The company has been seeing increased customer engagement levels on its website on account of the remote working environment. This isn’t expected to change anytime soon as its offerings are located on the cloud. ADBE remains the de facto standard in content creation software with its Document Cloud offering. Plus, as smartphone purchases increase, more people will be using its PDF file format. The company’s addition of marketing services in its digital experience segment should drive growth in the long term.
ADBE is rated a Buy with a grade of B in our POWR Ratings service. The company has a Sentiment Grade of B as it is well-liked by Wall Street analysts. Twenty-two analysts rate the company a Buy or Strong Buy. Plus, its stock is trading 10% below its average analyst price target. The company also has a Quality Grade of A due to a strong balance sheet.
As of the most recent reported quarter, ADBE had $5 billion in cash compared with no short-term debt. The stock also has a net profit margin of 40.7%. To get access to the rest of ADBE’s grades (Growth, Value, Momentum, and Stability), make sure to click here. ADBE is ranked #22 in the Software -Application industry.
CRM shares . Year-to-date, CRM has gained 5.25%, versus a 12.04% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.