While there’s no doubt that tech stocks were the source of much of the gains in 2020, it was the pandemic-induced stay-at-home trend that was the driving force. Many of the household stocks that have skyrocketed this year follow a software as a service (SaaS) business model. This is a type of licensing model where access to the software is provided on a subscription basis. Because the software is located on an external service, customers typically access it through a web browser rather than on their computer hard drives.
The SaaS business model has grown in importance with the rise of the cloud. Cloud computing is the provision of services such as data storage, networking and servers through the Internet. The cloud has saved companies time to update their software. It can also be less costly for front-end customers, as businesses don’t have to pay for multiple software licenses at once. For the SaaS business, this model provides a steady stream of revenue instead of convincing its customers to switch to new products.
Lots of tech companies offer this type of service, but in my mind there are three companies that not only had a strong 2020, but are poised to continue growing through 2021. That includes Shopify Inc. (STORE), Adobe Inc. (ADBE) and Microsoft Corporation (MSFT).
Shopify Inc. (STORE)
SHOP is an outlier on this list because it started as a SaaS company. ADBE and MSFT have both made the transition from selling single products to a subscription. SHOP offers an e-commerce platform for small and medium-sized businesses. Merchants pay a monthly fee to access the platform which provides all the tools needed to build and manage their e-commerce store.
The company was already successful before the pandemic, but COVID has propelled the growth of e-commerce into hyperdrive. In its most recent quarter, revenue jumped 96% year-over-year to $ 767 million. This is due to a 48% year-over-year increase in revenue from the subscription solutions segment as more merchants joined the SHOP platform to adapt to the shift of consumers to e-commerce.
Many entrepreneurs saw an opportunity during the pandemic to open their own online stores, while many large retail companies did not have the infrastructure in place to handle e-commerce orders. After the company reported a strong quarter, it reported record Black Friday and Cyber Monday sales, generating $ 5.1 billion in sales. The current quarter is expected to see a boost in holiday sales, and SHOP is expected to experience continued growth since the launch of the Shopify Fulfillment Network and its international expansion.
The share is rated “Strong Buy” in our POWR odds system. It holds an “A” rating for commercial quality, purchasing and retention rating, industry rating and a “B” rating for peer rating. The stock is also the # 1 ranked stock in the Internet services industry.
Adobe Inc. (ADBE)
Like SHOP, the pandemic has provided a strong tailwind for ADBE. The company is best known for its creative software solutions such as Photoshop and Illustrator. ABDE announced in 2013 that it was moving from ad hoc software sales to subscription products. This decision led to a strong performance of the stock, as it has gained 732% since the end of 2013, against only 99.9% for the S&P 500.
The company recently posted strong fourth quarter financial results. ADBE achieved record quarterly revenue of $ 3.42 billion, up 14% from $ 3 billion a year ago. Net income was $ 2.25 billion and adjusted earnings per share of $ 2.81, up 23% year over year. The company enjoys strong demand for its creative products. Its Creative Cloud, Document Cloud, and Adobe Experience Cloud products drive revenue growth.
ADBE is also seeing an increase in subscription revenues in its mobile applications, growth in emerging markets, and strong demand for online video creation. Although its stock retreated last fall, its future looks bright as the digital revolution has only just begun and the company is expected to see continued demand for its products.
The share is rated “Strong Buy” in our POWR rating system. It holds an “A” rating for Trade Grade and Buy & Hold Grade, and a “B” for Industry Rank. It is also the title ranked n ° 2 of the Software application industry.
Microsoft Corporation (MSFT)
The last company on this list is not a pure SaaS game, but many of its business segments are managed through a SaaS model. While many of us remember buying a CD to load Microsoft Office onto our computers and upgrading to the latest version every few years, its main programs like Word and Excel are now part of the platform. Microsoft 365 SaaS. These programs have been crucial for so many workers trapped in their homes during the pandemic.
In the quarter ending September, Cloud-based Office 365 subscription revenue grew 21% year-over-year. The company also offers other SaaS services, such as Microsoft Teams, which has enabled large enterprises to connect with its employees and its Azure cloud management platform, which is used to build, test, deploy and manage applications and services through Microsoft data centers.
We also can’t forget his Xbox activity. There are now over 15 million Xbox Game Pass subscribers and 100 million Xbox Live subscribers. Additionally, although not a SaaS company, Microsoft Windows is the dominant operating system on PCs. MSFT plays a role in many areas, but growth opportunities in cloud services will be a major catalyst for growth going forward.
The share is rated “Strong Buy” in our POWR rating service. It holds an “A” rating in the Trade Grade and Buy & Hold Grade category, and a “B” in Industry Rank. The stock is also ranked # 1 in the software – applications sector.
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BUY shares. Year-to-date, SHOP has gained 201.14%, compared to a 15.93% increase in the benchmark S&P 500 over 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 firms, hedge funds and online publications. David enjoys researching and writing about stocks and markets. It takes a fundamental quantitative approach in evaluating stocks for readers. More…