With Tech Selling Off, 3 SaaS Stocks We Would Buy Without Hesitation

Tech investors are cringing as many of their favorite stocks have sold off significantly since November. The tech-heavy Nasdaq Compound The index is down more than 15% from its peak, but that number doesn’t tell the story of what happens to individual investors.

The Nasdaq index is weighted by market capitalization, so larger companies (which are generally less volatile) can help lessen the impact of widespread downturns. For example, Apple and Microsoftwhich represent more than 20% of the index, are down only 10% and 16% off their highs respectively, while many small-cap tech companies are down 40%, 50%, or more from their recent highs.

Given the state of the market today, we asked three long-time Fool contributors to choose their favorite software-as-a-service (SaaS) stock they would buy right now, without hesitation. They have chosen Shopify ( STORE -1.59% ), Palantize (PLTR -4.04% )and monday.com ( MNDY -6.36% ).

Image source: Getty Images.

Shopify: Throwing the baby out with the bathwater

Danny Vena (Shopify): Given the sell-off that has hit tech stocks in recent months, the market has plenty of fast-growing online retail companies at discounted prices. Evidence suggests this could present a huge opportunity for savvy investors.

Even after hitting record highs in 2021, global e-commerce sales are expected to soar to $5.5 trillion in 2022, reaching $7.4 trillion by 2025. Perhaps most impressive is the fact that nearly 20% of every retail dollar spent in the coming years is expected to come from digital retail. This illustrates the large and growing opportunity for Shopify.

The company’s SaaS (software as a service) platform is the leading provider of digital retail solutions for merchants. Additionally, what started as a way for small and medium-sized businesses to join the e-commerce revolution has quickly expanded to include enterprise-level businesses as well.

Shopify provides merchants with all the cloud-based tools they need to set up and maintain an online retail operation. This includes simple things like building a website, and more complex solutions like helping merchants consolidate sales across multiple channels, including social media, web, mobile, online marketplaces, and even stores. physical.

The company provides solutions to simplify many of the day-to-day tasks necessary for success, including inventory, payments, product management, shipping and fulfillment, and even working capital loans for eligible merchants.

Considering the stock’s 66% plunge since mid-November, you might be tempted to think Shopify’s business is in trouble, but that’s just not the case. With the S&P500 and Nasdaq Composite both in correction territory, some investors dumped many high-growth stocks in search of safe havens – but the sell-off simply went too far.

Consider recent results from Shopify. Revenue grew 57% year-over-year in 2021, an impressive feat considering the 96% increase in 2020, fueled by the pandemic. It’s also telling that gross profit grew 61%, outpacing revenue growth, as the business capitalized on its growing scale. At the same time, adjusted net income jumped 66%.

Shopify has a base of over 1.7 million merchants, but that might just be the start. The company generated more than $4.6 billion in revenue last year, but that pales in comparison to Shopify’s total addressable market, which management estimates at around $153 billion.

Given its cutting-edge solutions, growing addressable market, and age-old tailwinds fueling accelerating e-commerce adoption, investors would do well to buy Shopify now, before the market realizes its scrutiny. .

A person who consults documents and uses a calculator.

Image source: Getty Images.

Palantir: Investors should consider targeting this analytics firm

will heal (Palant): Palantir is the SaaS stock taking data analytics to a new level. Its Apollo operating system is a tool designed to do analysis. This feature makes it stand out Snowflakewho seeks to collect data, or Alteryx, which focuses on data processing and presentation. Due to these differences, Palantir has no real competitor.

Knowing this, he applied Apollo to two different software systems, each targeting different markets. The Gotham system provides analytical information in the fields of national defense and law enforcement. Analysts credit Gotham with finding Osama bin Laden, among other successes.

Palantir’s Foundry system differs in that it seeks to apply these capabilities to drive business initiatives. The transition to a commercial orientation may have brought some uncertainty to the stock. However, given the limited number of customers for its government-related business, targeting commercial customers is arguably a necessary step.

Palantir seems to have succeeded in both markets. In 2021, government revenue grew 47% year-over-year, outpacing the commercial segment’s 34% increase over this period. That probably won’t surprise investors concerned about the conflict in Europe. However, the software has become more popular with American businesses as US business revenue jumped 102% during this period.

These successes helped the company generate more than $1.5 billion in revenue in 2021, a 41% increase over 2020 levels. The increase in this number was a net retention rate for the year by 131%. That means their average existing customer spent 31% more than in 2020.

Additionally, the company reduced its cost of revenue and operating expenses in 2021. This reduced losses to $520 million from nearly $1.2 billion in 2020. Additionally, the company forecast 30% annual revenue growth through 2025, a sign that customers have derived increasing utility from Gotham and Foundry.

Despite a strong earnings report, Palantir has lost more than half its value in the past year amid a technology selloff. That brought its price-to-sales (P/S) ratio down to 14, its lowest point since late 2020.

Admittedly, the increased focus on business customers could bring some temporary uncertainty. Still, its lower valuation, along with rising company earnings and industry tailwinds, could make Palantir a good investment for 2022.

Office team working with monday.com software in conference room.

Image source: monday.com

Monday.com: He has a massive growth track

Brian Withers (Monday.com): Monday.com is a no-code platform that empowers non-techies to build powerful software tools for the workplace. Whether it’s a customer relationship database, a project management tool, or a dashboard to track operational performance, Monday.com’s software offers ready-to-use templates. job for a quick upgrade. Its WorkOS software quickly replaces a patchwork of whiteboards, sticky notes, spreadsheets and emails with scalable collaborative apps. In fact, co-CEO Eran Zinman said on the most recent earnings call that when management approaches big companies, “70% of deals literally don’t compete.”

Let’s take a look at the latest quarterly results to see how fast this software is spreading. Revenue is growing at a breakneck pace and management expects growth of over 70% in the first quarter. What’s even more impressive is that this comes on top of a difficult 219% year-over-year growth recorded in the first quarter of 2021. Much of this growth is due to the fact that large customers, with over $50,000 in annual recurring revenue (ARR), are experiencing triple-digit growth. Indeed, its net dollar retention, the average amount spent by all customers over last year, continues to accelerate.

Metric

Q4 2020

Q3 2021

Q4 2021

Change (QOQ)

Change (YOY)

Income

$50.1 million

$83.0 million

$95.5 million

15%

91%

$50,000 ARR Customers

264

613

793

29%

200%

Net dollar retention

105%

>115%

>120%

5%

15%

Data source: Company earnings releases. QOQ = quarter over quarter. YOY = year after year.

But even with these incredible growth numbers, there’s plenty of room to grow. With a total addressable market of $56 billion, the company’s $384 million annual run rate is less than 1% of what’s possible.

As companies seek to embrace the new world of hybrid work arrangements, tools like Monday.com Work OS are becoming essential tools to ensure everyone is on the same page, regardless of location. where he works. With the stock price below its initial public offering price, this company has never been at a more attractive valuation. Savvy investors would do well to buy stocks cheap and sit back and enjoy market-beating performance over the next five to 10 years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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