ASX SaaS stocks stand out amongst tech companies on the bourse as being unique.
Software as a Service (SaaS) stocks represent shares of companies that provide cloud-based software services to customers on a subscription basis. These companies typically offer applications that can be accessed online without the need for users to install or maintain software locally.
Why have SaaS stocks become popular?
SaaS stocks have become increasingly popular as they are associated with companies that often exhibit recurring revenue streams, scalability, and the potential for significant growth due to the widespread adoption of cloud computing. Some well-known examples of SaaS companies around the globe include Salesforce, Adobe, and Zoom. There are plenty of high-quality SaaS stocks on the ASX too, which we will address shortly.
What are the advantages of investing in SaaS stocks?
Investing in SaaS (Software as a Service) stocks holds several advantages – we note five in particular. Firstly, SaaS companies often benefit from a predictable revenue stream due to their subscription-based business model, which can contribute to stable financial performance. Secondly, SaaS products typically have lower upfront costs for customers, encouraging adoption and increasing market penetration.
Thirdly, SaaS companies are well-positioned to scale quickly as they are not limited by physical product distribution constraints which, in turn, can lead to rapid growth and potential gains for investors. Fourth, SaaS businesses usually operate with higher margins due to low marginal costs for new users, enhancing profitability prospects.
And finally, given the increasing reliance on cloud computing and digital services, SaaS companies are poised to capitalize on the ongoing digital transformation, making them enticing for forward-looking investors seeking growth opportunities
What are some of the disadvantages of investing in SaaS stocks?
One of the main disadvantages of investing in SaaS stocks is their high volatility. As with any stock, the value of SaaS stocks can fluctuate greatly depending on market conditions and company performance.
This means that there is a higher level of risk involved when investing in SaaS stocks (and tech stocks more broadly) compared to more stable investments such as bonds or real estate. This volatility can be attributed to the fact that SaaS companies are often in the early stages of growth and may not have established a strong track record yet. Even amongst those stocks that do, the subscription nature of businesses can mean it is easier for clients to cease doing business with them.
Valued for growth
On a similar note – due to the popularity and potential for growth associated with SaaS companies – these companies are often priced at a premium compared to other types of stocks. This means that investors have to pay a higher price for each share, which may not always be justified by the company’s financial performance. If the stock market experiences a downturn, this high valuation could lead to significant losses for investors.
We also observe that, investing in SaaS stocks often requires a long-term outlook and patience. While these companies may show great potential for growth, it may take several years before investors see a return on their investment. This is because SaaS companies often prioritize reinvesting in the business to sustain growth rather than paying out dividends to shareholders.
Finally, another potential disadvantage of investing in SaaS stocks is the risk of competition and disruption. As technology continues to evolve, there is always a risk that new competitors may enter the market and disrupt the dominance of established SaaS companies. This could lead to a decrease in revenue and stock value for investors.
Our top 4 ASX SaaS stocks
If you run a business, you’re going to need accounting and payroll services and this is what Xero provides – and better than many of its peers. Since its founding in 2007, it has gradually developed features useful beyond book-keeping, such as storing files, converting currencies, keeping track of inventories and creating professional quotes.
Despite not being profitable, Xero has edged closer to this point and has continued to record solid growth. In FY23, it grew revenues by 28% to NZ$1.4bn, its subscribers by 14%, average revenue per user by 10% and its operating income by 61%. This performance has continued into FY24 with 21% revenue growth and 13% subscriber growth in the first 6 months of the year. Most importantly, it hit NPAT profitability, recording $54m.
Consensus estimates for the full FY24 call for NZ$1.7bn in revenue, up 21% and for a further 17% growth in FY25. Analysts also expect profitability for the full year and growth to continue. The mean target price is A$123.03, up 17% from the current share price.
Objective Corporation (ASX:OCL)
Objective Corporation has software products that can handle common problems or manually intensive tasks local governments and businesses in highly regulated sectors undertake on a daily basis as well as to store data. This software increases the ease, security and efficiency with which such tasks can be accomplished.
When it was founded, Objective Corporation was an on-premise license business but has transitioned into a subscription model. It makes 77% of its revenue from Australia, but also has a significant presence in New Zealand and the UK.
The company IPO’d in mid-2000 at just 50c per share, raising $6m. It has not raised a cent of capital ever since and has been 65% owned by founder and CEO Tony Wall. In FY23, it made $110m in revenue (up 4%) and a $21m profit (flat compared to FY22).
This stock is one of the best ways to play the growth of the Cloud. As we’ve noted before, the transition is still in early days, with spending on enterprise IT revenues easily dwarfing Cloud revenues. ReadyTech provides SaaS technologies in Australia and operates in three segments: Education, Workforce Solutions and Government and Justice – which also explain its end markets.
The company listed on the ASX in 2019 at $1.50 per share. Although it is off its all-time highs, it is still well ahead of its IPO price. Not bad considering the Tech Wreck and the disruption of a takeover offer that was ultimately rejected by shareholders. Analysts have set a 12 month target price of $4.29, a premium of over 20% to the current price. They expect revenue growth of 18% and the company’s profit to more than double in FY24.
Infomedia, which was founded in 1987, provides cloud-based parts and service software to the global automobile industry. It has over 250,000 active users in 186 countries and it has a healthy geographical mix of revenue (37% from the Americas, 32% from the Asia-Pacific and 31% from Europe).
Infomedia has four key products which complement each other while proving their individual worth at different stages of the vehicle and customer lifecycles – outlined in greater detail here. In FY23, it generated $130m in revenue (up 8%) and made a $9.6m profit (up 16%).
The bottom line is that investing in SaaS stocks can offer high returns and potential for growth. At the same time, it is important to consider the potential disadvantages, both those unique to SaaS stocks and those true to all listed companies.
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