Are Mid-Cap SaaS Stocks Still Attractive?

Andreas Milano

Software as a Service (SaaS) stocks were among the biggest winners post the Covid-19 stock market crash in March 2020 and it’s likely that the sector will remain in favor even after the pandemic ends, given the increasing digitization of business and a continued shift to distributed enterprises. Our theme on Mid-Cap SaaS Stocks includes software players that have shown strong revenue growth and consistent margin expansion and are trading at a market cap of under $10 billion. The theme is up by about 5% year-to-date, compared to the S&P 500 which has remained roughly flat year-to-date. Within the theme, PagerDuty, a company that provides an incident response platform for IT departments, has emerged as the strongest performer, rising by about 21% year-to-date. On the other hand, Mimecast, a company that sells cloud security and risk management services for email and corporate data, has underperformed, declining by about -22% year-to-date.

[Updated 12/30/2020] Mid-Cap SaaS Stocks

Software stocks have fared well this year, driven by a couple of factors. Firstly, the work from home trend and accelerated digital transitions by businesses has helped to boost demand. Secondly, with interest rates remaining low, investors have been paying a premium for growth stocks. Thirdly, SaaS (software-as-a-service) business models are driven by stable, recurring Revenues and this has resonated well with investors through the economic uncertainty of Covid-19. In our theme Mid-Cap SaaS Stocks, we have picked a few SaaS players with a market cap of under $10 billion that have performed well in recent years. With strong revenue growth and consistent margin expansion, these companies could be poised to outperform in the long-run. Below is a bit more about the key companies in our theme.

Workiva offers cloud-based solutions for enterprises to collaboratively collect, manage, report, and analyze business data in real-time across areas such as finance, accounting, and compliance. The stock is up 116% this year.

PagerDuty provides a SaaS incident response platform for IT departments that helps teams detect and fix infrastructure problems quickly. The stock is up 85% this year.

RealPage
RP
offers software-as-a-service solutions for property and real estate management. The stock is up 62% this year.

Mimecast develops cloud security and risk management services for email and corporate data. The stock is up about 30% this year.

New Relic
NEWR
develops cloud-based software that helps web and app developers to track the performances of their services. The stock is down about 2% this year.

See our theme on Mid-Cap SaaS Stocks for more details on the companies in the theme and their fundamental performance in recent years.

[Updated 6/19/2020] Mid-Cap SaaS Stocks

Software-as-a-service (SaaS) has emerged as one of the hottest investing themes in the tech sector driven by two broad trends. Firstly, the Covid-19 pandemic is forcing businesses to speed up their digital transitions, improving productivity and collaboration as people increasingly work from home. Secondly, SaaS companies are largely subscription-based, with a recurring revenue stream that could make them a relatively stable bet during times of uncertainty. It’s likely that the crisis will cause a structural shift, benefiting these stocks well past the pandemic.

Most large-cap SaaS stocks have rallied considerably this year, and valuations look somewhat stretched. However, we’ve done some analysis and picked a few mid-cap SaaS players (market cap of under $10 billion) that have appreciated by less than 20% this year despite posting strong revenue growth and expanding margins over the last 2 years. Our dashboard Trefis Theme: Mid-Cap Software-As-A-Service Stocks provides an overview of the fundamentals of 5 mid-cap SaaS stocks. A part of the analysis is summarized below.

Cloudera ($3.7 billion market cap, +9% YTD) sells data warehousing, data engineering, machine learning, and analytics software solutions to enterprises. While the company beat expectations over Q1, with subscription revenues growing by about 21% year-over-year, the stock has come under some pressure as its Q2 guidance fell slightly short of consensus. That said, the stock trades at about 4.7x trailing revenues, which is relatively attractive for the SaaS space considering its positive operating margins and high revenue growth (113% between 2017 and 2019, including acquisitions). The company is also viewed as a potential acquisition target.

Paylocity ($7 billion market cap, +10% YTD) provides cloud-based payroll and human capital management software that focuses on small and medium businesses. While the company’s business could face some headwinds due to the tough economy and high unemployment rate, its fundamentals are strong, with revenue growing by about 25% annually over the last two years. Moreover, the margins have been expanding quickly, from negative levels in 2016 to over 12% as of 2019. The stock trades at about 15x trailing revenues.

Altair ($3 billion, +7% YTD) provides software and cloud solutions for product design and development, high-performance computing, and data analytics. While the company’s revenues have grown at an annual rate of over 15% over the last two years, things could prove challenging in 2020 on account of the company’s significant exposure to the engineering and construction industries, which are likely to be badly impacted by the Covid-19 pandemic. The stock trades at about 6.1x, slightly below some other stocks in the group considering the mixed revenue outlook and the fact that margins have been slightly volatile.

New Relic ($4 billion, +3% YTD) develops cloud-based software that helps web and app developers to track the performances of their services. While the company’s operating margins have been improving, rising from around -23% in FY’18 to -7% in FY’20, the company expects earnings to decline this fiscal due to higher investments as it transitions to a new solution called New Relic One that unifies the company’s various offerings. The stock trades at about 8.5x trailing revenues.

Mimecast ($4 billion, +3% YTD) develops cloud security and risk management services for email and corporate data. The company’s business should get a boost from the current pandemic, as the work from home trend causes companies to invest more in security software. The company’s historical growth has been strong, with revenues expanding by 25% each year over the last two years, with operating margins also recently turning positive. The stock trades at about 6.5x trailing revenues.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with about 130% return since 2016, versus 70% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance TeamsProduct, R&D, and Marketing Teams

Next Post

All new UK cars could have special gadget fitted to stop you from speeding next year

ALL new UK cars could be fitted with a special gadget to stop you speeding from next year. The Intelligent Speed Assistance (ISA) technology will alert drivers when they are going too fast and can intervene if people continue to drive above the limit. 4 All new cars could be […]