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The 3 Best SaaS Stocks for 2021: Shopify, Adobe, and Microsoft

One of the bigger trends this year has been the rise of the cloud. This has led to strong gains in software-as-a-service (SaaS) stocks such as Shopify Inc. (SHOP), Adobe Inc. (ADBE), and Microsoft Corporation (MSFT). These three companies are poised to continue their growth paths into 2021.

While there is no doubt that technology stocks drove much of the gains in 2020, it was the pandemic driven stay-at-home trend that was the driving force. Many of the stay-at-home stocks that soared this year follow a software-as-a-service (SaaS) business model. This is a type of licensing model where access to software is provided on a subscription basis. Since the software is located on an external service, customers typically access it through a web browser instead of on their computers' hard drives.

The SaaS business model has gained prominence alongside the rise of the cloud. Cloud computing is the delivery of services such as data storage, networking, and servers through the internet. The cloud has provided a time-saving option for companies to update their software. It can also be less expensive for customers at the front end since companies don't have to pay for multiple software licenses at once. For the SaaS company, this model provides a steady stream of revenue instead of convincing its customers to upgrade to new products.

Numerous technology companies are offering this type of service, but in my mind, there are three companies that have not only had a strong 2020 but are poised to continue their growth into 2021. This includes Shopify Inc. (SHOP), Adobe Inc. (ADBE), and Microsoft Corporation (MSFT).

Shopify Inc. (SHOP)

SHOP is an outlier on this list as it started as a SaaS company. ADBE and MSFT both made the transition from selling one-off products to a subscription. SHOP offers an e-commerce platform to small and midsize businesses. Merchants pay a monthly fee to access the platform that provides all the tools necessary to build and manage their e-commerce store.

The company was already seeing success before the pandemic, but COVID drove e-commerce growth into hyperdrive. In its latest quarter, revenue jumped 96% year over year to $767 million. This was driven by a 48% year over year increase in revenue from the subscription solutions segment as more merchants joined SHOP's platform to accommodate the consumer shift to e-commerce.

Many entrepreneurs saw an opportunity during the pandemic to open their own online stores, while many larger retail companies didn't have the infrastructure in place to handle e-commerce orders. After the company reported a strong quarter, it announced record sales from Black Friday and Cyber Monday, generating $5.1 billion in sales. The current quarter should receive a boost from holiday sales, and SHOP should see continued growth from the launch of the Shopify Fulfillment Network and international expansion.

The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" for Trade Grade, Buy & Hold Grade, Industry Rank, and a "B" for Peer Grade. The stock is also the #1 ranked stock in the Internet-Services industry.

Adobe Inc. (ADBE)

Similar to SHOP, the pandemic provided a strong tailwind for ADBE. The company is best known for its creative software solutions such as Photoshop and Illustrator. ABDE had announced in 2013 that it was making a move from one-time software sales to subscription products. That move has led to strong stock performance, as it has gained 732% since the end of 2013, compared to only 99.9% for the S&P 500.

The company recently reported strong fourth-quarter financial results. ADBE achieved a record quarterly revenue of $3.42 billion, which was up 14% year over from $3 billion a year ago. Net income came in at $2.25 billion, and adjusted earnings per share were $2.81, up 23% year over year. The company is benefiting from strong demand for its creative products. Its Creative Cloud, Document Cloud, and Adobe Experience Cloud products are driving revenue growth.

ADBE is also seeing rising subscription revenues across its mobile apps, growth in emerging markets, and robust online video creation demand. While its stock pulled back this past fall, its future looks bright as the digital revolution is just getting started, and the company should see continued demand for its products.

The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" for Trade Grade and Buy & Hold Grade, and a "B" for Industry Rank. It is also the #2 ranked stock in the Software – Application industry.

Microsoft Corporation (MSFT)

The final company on this list isn't a pure SaaS play, but many of its business segments are run through a SaaS model. While many of us remember buying a CD to load Microsoft Office on our computers and upgrading to the latest version every few years, its leading programs such as Word and Excel are now part of the Microsoft 365 SaaS platform. These programs have been crucial to so many workers stuck at home during the pandemic.

In the quarter ending in September, revenue from subscriptions for the cloud-based Office 365 grew 21% year over year. The company also offers other SaaS services, such as Microsoft Teams, which has enabled large companies to connect with its employees and its cloud-management platform Azure, which is used to build, test, deploy, and manage applications and services through Microsoft-managed data centers.

We also can't forget its Xbox business. There are now more than 15 million Xbox Game Pass subscribers and 100 million Xbox Live subscribers. In addition, while not a SaaS business, Microsoft Windows is the dominant operating system in PCs. MSFT has its hand in many pies, but the growth opportunities in cloud services will be a major growth catalyst going forward.

The stock is rated a "Strong Buy" in our POWR Ratings service. It holds a grade of "A" in Trade Grade and Buy & Hold Grade, and a "B" in Industry Rank. The stock is also ranked #1 in the Software – Application industry.

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SHOP shares . Year-to-date, SHOP has gained 201.14%, versus a 15.93% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.


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