Introduction
According to Fortune Business Insights, the global cloud computing SaaS market is projected to have a CAGR of 18.4% between now and 2032 which should bode well for CC companies. This article highlights the 7 largest pure-play cloud computing SaaS software companies.
What is Cloud Computing?
Cloud computing (CC) is the technique of processing, storing, and managing data on a network of remote computers hosted on the internet by cloud service providers rather than on a personal computer or local server using only as much compute power and storage as needed to meet demand. This theoretically allows for cheaper and faster computing because it eliminates the need to purchase, install, and maintain servers.
What is SaaS?
SaaS, also known as cloud application services, makes software available to users over the internet, usually for a monthly subscription fee. They are typically ready-to-use and are run from a users’ web browser which allow businesses to skip any additional downloads or application installations. SaaS accounts for 38.5% of cloud computing revenue. (Source) For more insightful information you are encouraged to read Cloud Computing 101.
Image source: The Motley Fool
What Is the PEG Ratio?
Given that growth is a key component of a stock’s expected return, the PEG ratio provides a simple way for investors to see how cheap a stock is relative to its growth rate and compare it to its competitors.
The PEG ratio (price/earnings-to-growth ratio) builds upon the price-to-earnings (P/E) ratio by factoring in expected earnings growth. It takes into account not just the current earnings but also the company’s growth prospects. It is a quick calculation used to determine if a stock is trading at, above, or below fair value.
- A PEG ratio below 1.0 suggests that the stock price is undervalued relative to its expected future earnings growth. In other words, the market may not fully account for the company’s growth potential.
- Conversely, PEG ratios above 1.0 indicate that the stock price might be overvalued, as it isn’t necessarily supported by growth forecasts.
- Look for stocks with a PEG ratio below the industry median.
- The PEG ratio should be used along with the balance sheet, debt burden, and cash flow, or other valuation metrics that use the income statement. It’s also important to understand things like a company’s competitive advantage, its addressable market, and its long-term growth prospects.
- It’s a convenient rule of thumb but remember that the PEG ratio can vary based on earnings growth forecasts and the time frame being considered.
What is the Price-to-Sales Ratio?
The price-to-sales (P/S) ratio, which equals a company’s market capitalization divided by its annual revenue, is often used as a valuation metric for SaaS companies in place of the P/E ratio. A higher P/S ratio denotes optimism among investors that attractive revenue growth will continue and that the revenue will eventually generate profits.
Our Pure-Play Cloud Computing SaaS Stocks Portfolio
Below is a list of the 7 largest pure-play cloud SaaS software computing companies presented in descending order of their performances in November and in the past 3 months, their market capitalizations, their forward price-to-earnings, price/earnings-to-growth ratios, their forward price-to-sales ratios and the reasons behind their price changes:
- Atlassian (TEAM): UP 40.0% in November; UP 59.4% in the last 3 months
- Market Capitalization: $69B
- Forward Price-to-Earnings Ratio: 76
- Price/Earnings-to-Growth Ratio: 3.0
- Forward Price-to-Sales Ratio: 12.6
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for TEAM.
- Price Targets: Analysts set optimistic price targets for TEAM, with Loop Capital initiating coverage with a price target of $95 and Jefferies setting a target of $85.
- Market Performance: TEAM’s stock showed strong performance, trading at its YTD high and demonstrating positive momentum.
- Company Developments: Atlassian continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- HubSpot (HUBS): UP 28.8% in November; UP 47.1% in the last 3 months
- Market Capitalization: $37B
- Forward Price-to-Earnings Ratio: 82
- Price/Earnings-to-Growth Ratio: 3.2
- Forward Price-to-Sales Ratio: 12.6
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for HUBS. The consensus rating remained “Moderate Buy,” with many analysts maintaining a “Buy” rating.
- Market Performance: HUBS’s stock showed strong performance, trading at its YTD high and demonstrating positive momentum.
- Company Developments: HubSpot continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- AI and Sales Automation: HubSpot’s acquisitions added artificial intelligence, sales automation, and customer data management capabilities to its platform, attracting investor interest.
- Datadog (DDOG): UP 21.6% in November; UP 31.2% in the last 3 months
- Market Capitalization: $52B
- Forward Price-to-Earnings Ratio: 82
- Price/Earnings-to-Growth Ratio: 4.1
- Forward Price-to-Sales Ratio: 16.6
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for DDOG. The consensus rating remained “Moderate Buy,” with many analysts maintaining a “Buy” rating.
- Price Targets: Analysts set optimistic price targets for DDOG, with the average price target indicating a forecasted upside.
- Market Performance: DDOG’s stock showed strong performance, trading its YTD high and demonstrating positive momentum.
- Company Developments: Datadog continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- AI Adoption: The broader market sentiment towards tech stocks, especially those involved in AI, improved, driving up stock prices in the sector.
- MongoDB (MDB): UP 19.4% in November; UP 11.0% in the last 3 months
- Market Capitalization: $24B
- Forward Price-to-Earnings (P/E) Ratio: 123
- Price/Earnings-to-Growth (PEG) Ratio: 8.7
- Forward Price-to-Sales Ratio (PSR): 11.3
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for MDB. The consensus rating remained “Moderate Buy,” with many analysts maintaining a “Buy” rating.
- Price Targets: Analysts set optimistic price targets for MDB, with the average price target indicating a forecasted upside.
- Market Performance: MDB’s stock showed strong performance, trading close to its YTD high and demonstrating positive momentum.
- Company Developments: MongoDB continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- Cloudflare (NET): UP 13.9% in November; UP 21.6% in the last 3 months
- Market Capitalization: $5B
- Forward Price-to-Earnings Ratio: 12
- Price/Earnings-to-Growth Ratio: N/A
- Forward Price-to-Sales Ratio: 1.7
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for NET. The consensus rating remained “Hold,” but there were more “Buy” ratings compared to “Sell” ratings.
- Market Performance: NET’s stock showed strong performance, trading at its YTD high and demonstrating positive momentum.
- Company Developments: Cloudflare continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- Overall Market Sentiment: The broader market sentiment towards tech stocks improved, driven by enthusiasm about artificial intelligence and strong corporate earnings.
- ServiceNow (NOW): UP 12.6% in November; UP 22.9% in the last 3 months
- Market Capitalization: $217B
- Forward Price-to-Earnings Ratio: 67
- Price/Earnings-to-Growth Ratio: 2.1
- Forward Price-to-Sales Ratio: 17.0
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for NOW. The consensus rating remained “Moderate Buy,” with many analysts maintaining a “Buy” rating.
- Price Targets: Analysts set optimistic price targets for NOW, with Needham raising its price target to $1,150 from $1,075.
- Market Performance: NOW’s stock showed strong performance, trading close to its YTD high and demonstrating positive momentum.
- Company Developments: ServiceNow continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- AI and Digital Transformation: The company’s focus on AI and digital transformation initiatives attracted investor interest, especially with the growing demand for cloud-based software solutions.
- Workday (WDAY): UP 6.9% in November; DOWN 5.0% in the last 3 months
- Market Capitalization: $66B
- Forward Price-to-Earnings Ratio: 31
- Price/Earnings-to-Growth Ratio: 1.2
- Forward Price-to-Sales Ratio: 7.0
- Reasons for Price Change:
- Positive Analyst Ratings: Several financial analysts reiterated positive ratings for WDAY. The consensus rating remained “Moderate Buy,” with many analysts maintaining a “Buy” rating
- Price Targets: Analysts set optimistic price targets for WDAY, with Morgan Stanley raising its price target from $315.00 to $330.00.
- Market Performance: WDAY’s stock showed strong performance, trading very close to its YTD high and demonstrating positive momentum.
- Company Developments: Workday continued to show strong financial health and profitability metrics, which reassured investors about its future prospects.
- AI and Digital Transformation: The company’s focus on AI and digital transformation initiatives attracted investor interest, especially with the growing demand for cloud-based software solutions.
Summary
The above 7 pure-play cloud SaaS computing stocks had an average market capitalization of $67B, an average P/E of 68, an average PEG of 3.7 and an average PSR of 11.3. The model Portfolio went UP 19.3% in November after going DOWN 4.6% in October, is UP 25.6% in the last 3 months, and is now UP 9.2% YTD.
Conclusion
According to Fortune Business Insights, the global cloud computing SaaS market is projected to have a CAGR of 18.4% between now and 2032 which should bode well for CC companies.
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