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Did you know that the total market capitalization of the top 50 Software-as-a-Service (SaaS) companies exceeded $1.25 trillion this month? That number might not mean much unless you have a baseline.
Here you go: last July, the same group of pure-play SaaS providers -- including Salesforce.com, Adobe, Shopify (SHOP - Free Report) , Square (SQ - Free Report) , Workday, Twilio (TWLO - Free Report) , and Zscaler (ZS - Free Report) -- was only worth $700 billion.
That's right. In a year that included the economic asteroid of COVID-19, the aggregate size of these companies grew 80%!
How is this possible?
Welcome to the SOFTOSPHERE 2.0
In the video that accompanies this article, I describe the "bubbly" Software market environment in 2019 -- SOFTOSPHERE 1.0 -- that had investors paying over 20 times sales for companies like Zoom (ZM - Free Report) and Veeva Systems (VEEV - Free Report) . Often, it's simply about the rate of sales growth.
Here's what I wrote in July 2019...
How is it that large investors are still piling into software stocks trading at over 20X sales?
There are at least 4 major catalysts...
1. Software is primarily immune to the current tariff battles
2. Software is part of a secular "technology super cycle" as it vaults productivity while taming costs in nearly every industry
3. Software is "the brains" of innovation, with nearly infinite capability to shrink, manipulate, and enhance time and space
4. Software lives in its own "valuation stratosphere" based on the Rule of 40
This year I began calling the industries that comprise SaaS, IaaS (Infrastructure-as-a-Service), and other Software applications and platforms that make use of cloud computing, The SOFTOSPHERE -- and not just to make a doubly cute "cloud" and "valuation" reference but to highlight what a dramatic agent of change the Software universe now represents in economics and society.
It would take several thousand words to explain how investors value SaaS companies beyond simple ideas like the Rule of 40 and median price-to-sales troughs/peaks.
But two good places to begin your journey are annual recurring revenue (ARR) and net dollar retention (or expansion), which measures "how many customers do you keep and how much more are they spending."
Since SaaS companies typically like to create 1-3 year subscription contracts with their large business customers, the IRS likes to get involved too, creating fun for accounting wizards.
But I don't get too wrapped up in the details of those metrics.
I find that following smart investors and analysts usually pays off enough. And smart customers, like the Raving Fans of Alteryx .
Digital Transformations Just Went Warp Speed
Time traveling back to the future of July 2020, we find the whole SOFTOSPHERE just got supercharged like a cumulonimbus thunderhead.
In perfect hindsight, here were the catalysts I listed a few weeks ago...
4 factors combined to drive investment cash into Tech, especially Software:
1. Cloud Migration and Digital Transformation were forced to accelerate
2. The "remote economy" reset sector allocation models. Economic asteroid = disruption for investors and they follow corps seeking DX/Cloud/5G/AI ascension.
3. Valuation models got bumped higher for "growth at any price."
4. Still true that "they have to buy" to compete with the index, and each other.
These, plus extraordinary monetary and fiscal liquidity, brought the flood of investment cash and combined to create a vicious FOMO chase.
And Twilio just confirmed another way of looking at what propelled corps to fly to the cloud and buy every SaaS subscription they thought their remote workers needed.
In the video, I share the details on a survey they did of thousands of IT decision makers across the globe which found that digital transformations just accelerated by six years!
Be sure to join me and see all the companies and their stratospheric price-to-sales valuations (and don't even talk about profits).
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.1% per year.
These 7 were selected because of their superior potential for immediate breakout.
Software Goes Stratosphere on Planet COVID
Did you know that the total market capitalization of the top 50 Software-as-a-Service (SaaS) companies exceeded $1.25 trillion this month? That number might not mean much unless you have a baseline.
Here you go: last July, the same group of pure-play SaaS providers -- including Salesforce.com, Adobe, Shopify (SHOP - Free Report) , Square (SQ - Free Report) , Workday, Twilio (TWLO - Free Report) , and Zscaler (ZS - Free Report) -- was only worth $700 billion.
That's right. In a year that included the economic asteroid of COVID-19, the aggregate size of these companies grew 80%!
How is this possible?
Welcome to the SOFTOSPHERE 2.0
In the video that accompanies this article, I describe the "bubbly" Software market environment in 2019 -- SOFTOSPHERE 1.0 -- that had investors paying over 20 times sales for companies like Zoom (ZM - Free Report) and Veeva Systems (VEEV - Free Report) . Often, it's simply about the rate of sales growth.
Here's what I wrote in July 2019...
How is it that large investors are still piling into software stocks trading at over 20X sales?
There are at least 4 major catalysts...
1. Software is primarily immune to the current tariff battles
2. Software is part of a secular "technology super cycle" as it vaults productivity while taming costs in nearly every industry
3. Software is "the brains" of innovation, with nearly infinite capability to shrink, manipulate, and enhance time and space
4. Software lives in its own "valuation stratosphere" based on the Rule of 40
This year I began calling the industries that comprise SaaS, IaaS (Infrastructure-as-a-Service), and other Software applications and platforms that make use of cloud computing, The SOFTOSPHERE -- and not just to make a doubly cute "cloud" and "valuation" reference but to highlight what a dramatic agent of change the Software universe now represents in economics and society.
(end of July 2019 excerpt from Software Valuations and the Rule of 40)
The Metrics of SaaS Investing
It would take several thousand words to explain how investors value SaaS companies beyond simple ideas like the Rule of 40 and median price-to-sales troughs/peaks.
But two good places to begin your journey are annual recurring revenue (ARR) and net dollar retention (or expansion), which measures "how many customers do you keep and how much more are they spending."
Since SaaS companies typically like to create 1-3 year subscription contracts with their large business customers, the IRS likes to get involved too, creating fun for accounting wizards.
But I don't get too wrapped up in the details of those metrics.
I find that following smart investors and analysts usually pays off enough. And smart customers, like the Raving Fans of Alteryx .
Digital Transformations Just Went Warp Speed
Time traveling back to the future of July 2020, we find the whole SOFTOSPHERE just got supercharged like a cumulonimbus thunderhead.
In perfect hindsight, here were the catalysts I listed a few weeks ago...
4 factors combined to drive investment cash into Tech, especially Software:
1. Cloud Migration and Digital Transformation were forced to accelerate
2. The "remote economy" reset sector allocation models. Economic asteroid = disruption for investors and they follow corps seeking DX/Cloud/5G/AI ascension.
3. Valuation models got bumped higher for "growth at any price."
4. Still true that "they have to buy" to compete with the index, and each other.
These, plus extraordinary monetary and fiscal liquidity, brought the flood of investment cash and combined to create a vicious FOMO chase.
And Twilio just confirmed another way of looking at what propelled corps to fly to the cloud and buy every SaaS subscription they thought their remote workers needed.
In the video, I share the details on a survey they did of thousands of IT decision makers across the globe which found that digital transformations just accelerated by six years!
Be sure to join me and see all the companies and their stratospheric price-to-sales valuations (and don't even talk about profits).
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.1% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>