What defines a megatrend? In market terms, a megatrend is based on changing spending patterns to which the market is responding. This differentiates it from a market trend, which is based on changing stock prices that may or may not correctly anticipate spending trends. For an example of a market trend, note the rising price of companies that attempted to associate themselves with blockchain technology earlier this year. Note particularly how quickly these trends come and go; this trend was in full swing just six months ago, and it already feels like ancient history.
An even more practical definition of a megatrend is any trend that continues to be a trend after the market has already noticed that it is a trend and responded accordingly. Such is the case with the trend we’ll be looking at today, the rising power of software as a service companies. It seems that most companies, and even individuals, would rather pay for services they are actually using than make big one-time investments in software that may or may not prove useful. Here are five companies that are riding the trend—the ones I feel most likely to continue to ride it.
And a quick word on companies that didn’t make today’s list: Salesforce.com (CRM) is a great company, but as it is an industry leader, I’m assuming my readers already know about it. Shopify (SHOP) is company I personally own stock in, but one that gets a great deal of press already. I’m not including highly specialized companies such as Autodesk (ADSK) and Alteryx (AYX), as their upside has clear natural limits.
Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.
Nutanix (NTNX)
Some SaaS companies offer more comprehensive solutions while others are more specialized. Nutanix, on the other hand, offers an entire IT package, beginning with the operating system itself. According to the company’s website, Nutanix integrates compute, virtualization, storage, networking, and security to power any application at any scale. This is not a profitable company, but it is expected to make huge strides toward profitability in 2018. Analysts are forecasting an operating loss of $0.68 in 2018 as opposed to a loss of $3.57 in 2017. In the meantime, revenue is rising by 50% annually. When this company begins to post profits, shares of NTNX are likely to rise like they are spring-loaded.
Chart courtesy of www.stockcharts.com
Splunk (SPLK)
Splunk monitors and analyzes machine generated big data. The task is extremely hardware intensive, which is why, for companies that need the service, the ability to do the work in the cloud is well-nigh irresistible. I first identified Splunk back in April, and then in May it beat expectations for both earnings and revenue while also raising its revenue target for the second quarter. Since then, the company has weathered a slew of downgrades, which, given its continuing and steady growth, seem to indicate that it has simply gone out of fashion. If that’s true, then this is the perfect time to buy it.
Chart courtesy of www.stockcharts.com
Workday (WDAY)
Workday offers a full suite of enterprise solutions for managing internal business processes, including finance, human resources, projects, procurement, inventory, payroll, etc. It is often listed as a competitor of Salesforce.com, and while there is some overlap, Salesforce.com’s focus is much more on customer management. Having only just crossed into profitability in its fiscal 2017, the company achieved the impressive sounding year-over-year earnings growth rate of 758% in its fiscal 2018. It also has a compound annual revenue growth rate of 49%. As is the case with Salesforce.com, Workday, with its market cap of $28 billion, has the benefit of competing against Oracle (ORCL) with its market cap of $189 billion and SAP (SAP) with its market cap of $140 billion, both of which have extremely low customer satisfaction ratings.
Chart courtesy of www.stockcharts.com
Dropbox (DBX)
Dropbox offers exceptionally useful free software for cloud storage of personal files. Everyone seems to know about it and/or use it, so it makes sense that it is in a good position to sell premium services. The company went public back in March, and the stock price is currently not much changed since then. What everyone is wondering about is what exactly happened between then and now, when the share price rose from $30 to $42 over the course of just a few trading sessions on no real news. Best guess? Someone big (speculation has fallen mostly on Salesforce.com and Microsoft, but it’s just that, speculation) was interested in acquiring the company and liked its price at about $12 billion, but potential buyer mishandled things in such a way as to let the news leak out to fund managers and market makers. This caused the price to rise by 40%, at which point, the potential buyer either found the price too high or was too embarrassed by the leak to complete the transaction. If that guess is correct, someone may yet swoop in to acquire this company, especially now that its share price is back to where it was before the kerfuffle.
Chart courtesy of www.stockcharts.com
Paycom (PAYC)
Paycom is exciting because it is one of the only SaaS companies focused on employee payroll, a complex process that gives many an employer headaches. It’s a great entry, and it lends itself perfectly to expansion. Paycom is no flash-in-the-pan, having gone public more than four years ago at an adjusted $16.25 and risen from there by 500%. Still, with its market cap of just $6.3 billion, and its consistent revenue growth (22% year-over-year), there is every reason to believe it will continue to outperform the market for the foreseeable future.
Chart courtesy of www.stockcharts.com
Veeva (VEEV)
I’m throwing this in as a freebie since I identified Veeva just last week as one of the market’s coolest companies. This company makes software for the huge and complex clinical trials and FDA submission industry. Veeva’s profits have tripled over the past three years and are expected to rise 47% in the company’s fiscal 2019. I’ve mentioned the stock’s high P/E, but in the past weeks, the company has made two encouraging announcements. First, the company has found that 87% of the companies in the industry seek to unify their clinical trials processes. Second, the company announced that it had worked with Idorsia Pharmaceuticals to create just such a unified clinical trials software platform in less than twelve months.
Chart courtesy of www.stockcharts.com
