3 Software Stocks Analysts Love: CrowdStrike, Bill.com, Five9
December 14, 2020 at 06:05 AM EST
The COVID -19 pandemic has awakened the hidden potential of many cloud-based software companies. While Zoom (ZM) has been one of the biggest beneficiaries of the expanding remote working and learning culture, some smaller players have outperformed ZM. For instance, despite experiencing an impressive rally, CrowdStrike (CRWD), BILL.COM (BILL), and Five9 (FIVN) are still analysts’ favorites due to their handsome growth potential.
This year marked the beginning of the new age for investors and analysts. The unprecedented global coronavirus pandemic has driven unusual stock market behavior. Traditionally, in economic crises, investors are drawn toward low-risk dividend stocks or safe-haven assets like gold, seeking safe places to store value. But this year, amid the pandemic, investors have been less likely to follow the typical formula and instead have gone for high-risk tech stocks based on the stocks’ perceived ability to capitalize on the stay-at-home conditions the pandemic has caused.
Although some traditional analysts have characterized this market behavior as a tech bubble because of high valuations some tech stocks have hit, most analysts think otherwise. They concede that these high-growth software-as-a-service (SaaS) stocks often appear overvalued by conventional valuation multiples during their hyper-growth stage but note that not all companies in the hyper-growth stage succeed; they face competition from already established giants that can decelerate their growth, making it difficult for them to meet investors’ expectations. But there those that succeed and can grow by leap and bounds they maintain.
The pandemic has forced people worldwide to depend more on technology, and with that an SaaS way of working has gained huge popularity. The work, learn, shop, and pay from home culture has given rise to major acceleration in cloud computing. Witness Amazon (AMZN) and Zoom Video Communications (ZM), which have seen their stocks surge 85%. But some smaller players too have outperformed even AMZM. Stocks of CrowdStrike Holdings, Inc. (CRWD), BILL.COM HOLDINGS, INC. (BILL), and Five9, Inc. (FIVN) are cases in point, having surged 430%, 296%, and 188%, respectively, since mid-March.
How to analyze a SaaS stock
The last decade saw the rise of cloud computing as companies put their software on the cloud to make it accessible to subscribers from anywhere on any device that has a stable internet connection. Many cloud-based software companies moved to a subscriptions model, which has three stages of growth:
In the first stage, a SaaS company spends heavily on customer acquisition to attract a large consumer base to its platform.
In the second stage, it tries to retain customers and cross-sell other products or premium subscriptions. In both these stages, it has high revenue growth but generates losses, which they can bear because of their low capital requirements.
In the third stage, it scales up to gain market share organically or through acquisitions and sees rising profits, though its revenue growth slows.
CRWD, BILL, and FIVN are in the first two stages of growth. Analysts are bullish on the stocks because of their high revenue growth rate, recurring revenue, and significant growth potential.
CrowdStrike Holdings, Inc. (CRWD)
CRWD is a cloud-focused cybersecurity firm that protects endpoints using machine learning and artificial intelligence. In this age of digitization, CRWD has immense growth potential. The number of endpoints is growing, from laptops, smartphones, and IoT (internet-of-things) devices currently, to smart cities, drones, and self-driving cars in the future. Cybersecurity Ventures predicts that cybercrime costs will increase at a CAGR of 15% between 2020 and 2025 to $10.5 trillion.
It is CRWD’s customer base that makes it a strong contender. It serves nearly half of the Fortune 100 companies, including some of the world's largest banks, healthcare providers, and energy companies.
Pandemic-induced remote working and learning has accelerated the digital transformation and pushed the need for secure endpoints in every home. CRWD's revenue surged 86% year-over-year in the third quarter; its annual recurring revenue (ARR) and subscriber count surged 81% and 85%, respectively.
CRWD began trading on NASDAQ in June 2019, and after tepid growth until March, picked up the pace, growing 430% from $33 to $176 in just nine months. The stock is now trading at 50 times its sales per share. Such lofty valuation reflects investors’ high expectations for the company; its revenue surged 93% in fiscal 2020.
However, CRWD’s revenue growth is decelerating, with analysts’ expecting its fiscal 2021 and 2022 revenue to grow 78.5% and 40%, respectively. Moreover, it faces competition from FireEye (FEYE) and Palo Alto Networks (PANW).
However, Baird analyst Jonathan Ruykhaver has noted that CRWD has been beating consensus revenue and earnings estimates and he thinks it will continue to do so in fiscal 2022l. He has thus upgraded the stock to Outperform. Based on the ratings offered by 17 Wall Street analysts, the consensus rating for CRWD is “Strong Buy.”
How does CRWD stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for overall POWR Rating
You cannot ask for better.
BILL.COM HOLDINGS, INC. (BILL)
BILL offers cloud-based business-to-business (B2B) payment services that help small and medium-sized businesses (SMBs) pay their suppliers, vendors, and other partners. While BILL’s core revenue source is subscriptions, it also earns transaction-based commission and interest on the money it holds for its clients. In fiscal 2020 ended September, it earned 15.5% of its revenue from interest income; its revenue from interest will likely surge because BILL processes higher dollar transactions and the Fed, in due course, increases interest rates.
Unlike other SaaS companies, BILL saw a pullback in transaction volume as the pandemic-induced economic downturn impacted many SMBs. As the economy recovers, BILL is seeing the return of the pre-pandemic level growth. In the fiscal 2021 first quarter ended September 30, its revenue surged 31% year-over-year, driven by a 27% growth in customers and 31% growth in payment volume processed. This growth is slower than it reported in its fiscal 2020 second quarter ended December 31,2020. At that time, its revenue had surged 50% as customer numbers and payment volume increased by 20% and 41%, respectively.
BILL is looking for ways to monetize accounts-receivable by offering suppliers quicker payments via virtual cards. What makes BILL a strong contender is its deals with big names like Mastercard (MA) and American Express (AXP).
BILL started trading on NYSE in December 2019 and, after a tepid growth till early April, picked up the pace, growing 362% from $31 to $145 in just eight months. The stock is now trading at 60.6 times its sales per share, reflecting investors’ high expectations. However, its revenue growth is decelerating, and it faces competition from Square (SQ) and PayPal (PYPL).
Analysts expect BILL’s revenue growth to slow to 24% in fiscal 2021 from 45% in fiscal 2020. But bullish analysts expect the company to beat the consensus estimate by 40%-60%.
Wolfe Research analyst Darrin Peller wrote: "The magnitude of revenue growth potential in the medium-term vs consensus skews the risk/reward dramatically upward.” And Guggenheim analyst Jeff Cantwell wrote, “Bottom line, we believe the shift by SMBs to digital creates a secular tailwind that the company is well-positioned to support…” Of12 Wall Street analysts that rated the stock, 8 rated it a “Strong Buy.”
Hence, BILL stock is rated “Strong Buy” in our POWR Rating system. It holds a straight “A” in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the Software - Application industry, it is ranked #13 of 96 stocks.
Five9, Inc. (FIVN)
FIVN offers a cloud-based Virtual Contact Center that enables organizations to build scalable and flexible contact centers for service, sales, and marketing customer interactions. Agents can log in to the platform from anywhere in the world that has a stable internet connection and take calls.
FIVN serves more than 2,000 customers globally, including big names like Citrix Systems (CTXS) and Expedia Group (EXPE). It has integrated its solution with Salesforce (CRM), Microsoft (MSFT), and ServiceNow (NOW). Its platform enables clients to manage customer interactions across voice, chat, email, web, social media, and mobile.
FIVN saw significant growth during the pandemic because many organizations, big and small, have allowed their employees to work from home. Its third-quarter revenue surged 34% year-over-year--its highest growth in six years. Its EBITA margin rose to 21.5%.
FIVN has been trading on NASDAQ since April 2014, growing steadily for the last six years between 90% and 50%. The pandemic has accelerated its growth. The stock has gained 190% since mid-March. It is now trading at 24 times its sales per share, while its revenue continues to grow in the 25%-29% range. However, analysts expect its revenue growth to decelerate to 29% in 2020 and 18% in 2021. It also faces competition from Talldesk and India-based Genesys. Of19 Wall Street analysts that rated the stock, 13 rated it a “Strong Buy.”
But FIVN still has significant growth potential as it taps a $24 billion contact center software opportunity. Hence, FIVN is rated a “Strong Buy” in the POWR Ratings. It holds a straight “A” in Trade Grade, Buy & Hold Grade, and Industry Rank and a “B” for Peer Grade. It is also the #14 ranked stock in the 96-stock Software - Application industry.
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CRWD shares were trading at $174.68 per share on Monday morning, down $1.24 (-0.70%). Year-to-date, CRWD has gained 250.27%, versus a 16.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Puja Tayal
Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles.3 Software Stocks Analysts Love: CrowdStrike, Bill.com, Five9 appeared first on StockNews.com