Software-as-a-service companies are known for their explosive revenue growth. Given the ongoing migration from on-premise to the cloud, these revenue trends are sustainable. Below are some of the best SaaS stocks to buy and hold.
According to Orlando Bravo, one of the most successful technology investors, software is the best business in the world. The industry has higher growth rates, recurring revenues and best-in-class gross margins. Considering the success of Thoma Bravo, it is worth paying closer attention to the SaaS industry to unearth long-term winners.
Although SaaS stocks typically exhibit above-market growth, the space is highly competitive. Indeed, only a few companies manage to build economic moats around their business and increase barriers to entry. Thus, this SaaS stocks to buy and hold list will focus on the best-of-breed software companies.
The following businesses have become platform companies that thousands of large enterprises rely on. Today, they are the market leaders in their segment and are still achieving remarkable growth. Given their dominance, these stocks will soar over the next five years as cloud migration continues.
ServiceNow (NOW)
ServiceNow (NYSE:NOW) is one of the most critical enterprise software companies. Its Now platform integrates varying data systems and siloed software to automate workflows and boost productivity. According to Gartner, ServiceNow has been a leader in ITSM (IT Service Management) for nine consecutive years.
Due to the productivity and efficiency gains from its software, customer relationships have expanded. Q3 2023 earnings revealed that customers with over $1 million in annual contract value grew from 1,258 in Q3 2021 to 1,789 in Q3 2023. What’s more, the average ACV of customers with at least $1 million in ACV grew from $3.6 million to $4.4 million over the same period.
Based on the growth above, it’s clear that customers see benefits and continue to increase spending. Today, ServiceNow is leveraging AI to improve the Now Platform. This will enhance the stickiness of the Now Platform, making ServiceNow one of the top SaaS stocks to buy and hold. Features like performance analytics, predictive intelligence and virtual agents will improve its value proposition to customers.
In terms of growth, ServiceNow is still shining. It has consistently achieved over 20% revenue growth. Moreover, profitability is accelerating, with the firm reporting 30% free cash flow margins. AI presents opportunities to enhance the Now Platform and the stock should be a mainstay in your portfolio.
Workday (WDAY)
This cloud-only human capital management software provider has led innovation in the space since its launch in 2005. Today, over 10,000 organizations use Workday (NASDAQ:WDAY) for finances and human resources. Remarkably, over 50% of the Fortune 500 are customers.
Since its launch, Workday has disrupted traditional ERP providers such as SAP SE (NYSE:SAP) and Oracle (NYSE:ORCL), taking market share. As a result, the company has achieved an impressive 21% compounded annual revenue growth revenue growth over the last five years. According to Gartner Research, it’s the leading cloud ERP provider worldwide, with a 21% market share.
The company sees growth opportunities in introducing more solutions. After starting in human resources, it introduced financial and spending management solutions to address the needs of chief financial officers. Since 75% to 80% of financial software is still on-premises, a significant growth opportunity exists.
Furthermore, Workday is targeting growth in the underpenetrated medium enterprises space. In its September 2023 investor presentation, management stated they expect over 50% of new ACV from the segment. They also plan to target medium-sized enterprises in the U.K., Germany, France, Canada and Australia.
For the long term, management sees a $58 billion market opportunity in HCM and $84 billion in financial services. As they pursue this market, they expect to increase core customers from 5,000 to over 40,000. Based on these projections, they see 17% to 19% annual subscription revenue growth.
Lastly, management sees a huge white space opportunity in the top 100 accounts. They forecast over $2 billion in incremental annual recurring revenue. These incremental growth opportunities, an expanding total addressable market and international expansion mean Workday is one of the top SaaS stocks to buy and hold.
Salesforce (CRM)
As a pioneer of the SaaS model, Salesforce (NYSE:CRM) has grown to be one of the largest cloud companies. It offers mission-critical software used in the full sales cycle, from lead generation to customer retention. According to International Data Corporation (IDC), it is the category leader with over 20% market share.
The company has quickly integrated AI into its products, enabling enterprises to offer personalized digital experiences. By leveraging customer interactions, companies are creating customized experiences using Salesforce. For instance, creating personalized email segments with customer-specific information.
AI will be a massive growth opportunity and the company is leading innovation with its Einstein GPT Copilots. During the Q3 fiscal year 2024 earnings call, management disclosed that 17% of the Fortune 100 are using the product.
Secondly, the new data cloud product is gaining significant traction. Furthermore, there are substantial upsell opportunities among its various clouds, which include Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud, Slack, Tableau, MuleSoft, among others. In Q3 fiscal year 2024, nine out of ten deals included six or more clouds, highlighting the multi-cloud momentum.
Salesforce continues to deliver improvements, expecting FY2024 non-GAAP operating margins of 30.5%. That’s an 800-basis point improvement showing the focus on profitability. The company has also stepped up its share buyback program, returning $10 billion in five quarters.
With Data Cloud, Einstein GPT Copilots and upsell opportunities, CRM remains one of the best SaaS stocks to buy and hold. It trades at 34 times forward earnings, a reasonable valuation for a high-quality cloud stock.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.