Instructure, Fastly: Fast Growing Mid-Cap SaaS Stocks To Watch

Our theme of Mid-Cap SaaS Stocks screens for software stocks that have a market cap of between $2 billion and $10 billion and have grown revenue by 50% or more over the last two years. These stocks have underperformed meaningfully this year, declining by about 7% year-to-date on an equally weighted basis, compared to the S&P 500 which remains up by about 21%. Now we think that the outlook for these stocks could remain somewhat mixed in the medium term. While the increasing digitization of business and the remote working trend through Covid-19 was a big driver of sales for software players, growth could cool a bit as companies gradually begin bringing employees back into the office, with Covid cases on the decline and vaccination rates improving. Secondly, with interest rates on the rise, investors could rotate from growth stocks into value. This could hurt the stocks in our theme, considering that they trade at an average price to sales multiple of about 14x, versus about 6.5x for the S&P 500.

Within our theme, Instructure Holdings, an education technology company, has been the strongest performer, with its stock rising by about 26% year to date. On the other side, Fastly stock has been the weakest performer, declining by about 45% year-to-date, due to weak quarterly results and also as the company lost business from its once largest customer, ByteDance.

Looking for stocks that stand to benefit from the growing digitization of the economy? Check out our theme of Internet Infrastructure Stocks

[8/30/2021] Fast Growing Mid-Cap Software Stocks To Watch

Our theme of Mid-Cap SaaS Stocks screens for software stocks that have a market cap of between $2 billion and $10 billion and have grown revenue by 50% or more over the last two years. The theme has underperformed this year, declining by about 9% year-to-date, on an equally weighted basis, compared to the Nasdaq-100 which is up by about 20%. However, the performance picked up a bit over the last week (five trading days), rising by about 4% versus the Nasdaq which was up by about 2%. We think there are a couple of trends that point to the continued strong performance of the theme. With Covid-19 cases surging once again in the U.S., companies are delaying their return to office plans and this should bode well for software stocks, which stand to benefit from the increasing digitization of business and the remote working trend. Valuations are also looking reasonable, given the correction over the last few months and the high growth rates that most of the companies in the theme are posting.

Within our theme, Instructure Holdings a company that provides learning-management systems used at colleges and schools, has been the strongest performer, rising by 20% so far this year (the company went private last March and re-listed once again in July 2021). On the other side, Fastly stock has been the weakest performer, declining by about 55% year-to-date, due to weak Q2 2021 results and also as the company lost business from its once largest customer, ByteDance.

[6/28/2021] Mid-Cap Software Stocks

Our theme of Mid-Cap SaaS Stocks includes software stocks that have a market cap of between $2 billion and $10 billion and have grown revenue by 50% or more over the last two years. The theme has underperformed considerably this year, declining by about -6.5% compared to the Nasdaq-100 which is up by about 13% over the same period. However, the underperformance is linked more to technical and macro factors, rather than fundamentals. While the businesses have largely continued to perform well, the anticipation of sooner than expected rate hikes by the U.S. Federal Reserve and rising inflation through the Covid-19 re-opening have caused investors to rotate out of high-growth stocks.

Overall, we think this group of stocks remains a solid long-term bet due to multiple factors, including greater digitization of business following Covid-19, higher corporate IT spending following a muted 2020, and also the broader pivot of the software industry to recurring revenue models. Within our theme, the stock Cloudera has been the strongest performer, with its stock up by about 13% year-to-date as the company agreed to be bought out by private equity firms KKR and Clayton, Dubilier & Rice, for $5.3 billion. On the other side, Fastly stock has been the weakest performer, declining by about -31% year-to-date, partly due to its mixed performance over 2020 and also as the company lost business from its once largest customers, TikTok owner ByteDance. Other stocks in our theme include Pagerduty, which is up by about 8% year to date, and Smartsheet, which is up by about 6%.

[6/4/2021] Mid-Cap SaaS Stocks

Our theme of Mid-Cap SaaS Stocks has underperformed, declining by about 18% year-to-date, driven by the broader correction in cloud software names this year. This performance is worse than the broader Nasdaq-100, which is up about 7% over the same period, . However, we think that the theme – which filters for software stocks with a market cap of under $10 billion with two-year revenue growth of over 50% – is poised for strong returns in the long run. Corporates are budgeting to spend more on areas such as cloud computing, big data analytics, cybersecurity, and artificial intelligence and all these factors will drive revenue growth for software stocks. Mid-cap software names are likely to provide better returns compared to the large-cap software stocks in the future, while potentially being less volatile compared to small-cap stocks.

Within our theme, enterprise data software company Cloudera stock has been the strongest performer, rising by about 14% year-to-date, after the company recently agreed to be bought out by private equity firms KKR and Clayton, Dubilier & Rice, for $5.3 billion. On the other side, Fastly a cloud computing infrastructure services provider, has been the worst performer with its stock down by 45% year-to-date. Other stocks in our theme include PagerDuty, down 2.6% this year, Smartsheet down 10%, and Mimecast Limited, down 12%. See our theme Mid-Cap SaaS Stocks for the complete list of stocks.

[3/26/2021] Mid-Cap SaaS Stocks The Best Play On The Tech Sell-Off?

Software stocks outperformed over 2020, as they escaped the fallout of the Covid-19 pandemic, with demand rising on account of the remote working trend and higher software spends by businesses. 2021, however, has proved much more challenging for the sector, as investors have been re-allocating funds from growth sectors, such as software, to more cyclical and value names that should stand to benefit as the economic recovery gathers pace. That being said, the longer-term themes of digitization and higher software spend remain intact, potentially making this a good entry point for software stocks.

In our theme of Mid-Cap SaaS Stocks, we’ve picked SaaS players with a market cap of under $10 billion that have posted robust revenue growth over the last two years. We believe that these stocks have scope for better returns compared to large-cap software names in the long run while being less volatile compared to small-cap stocks. The theme remains down by about 25% year-to-date, compared to gains of about 9% on the broader S&P 500. Within our theme, New Relic develops cloud-based software that helps web and app developers to track the performances of their services, has seen the smallest decline, with its stock down by about 13% year-to-date. On the other side, Fastly a cloud computing services provider, has been the worst performer with its stock down by 54% year-to-date.

[3/26/2021] Mid-Cap SaaS Stocks

Software stocks fared well over the last year or so, escaping the fallout of the Covid-19 pandemic, as the work from home trend and the accelerated digital transformation by businesses helped to boost demand. That said, most of the action has been in the large-cap software space, with valuations soaring to multi-year highs. However, we think that mid-cap software stocks look attractive in the current market. In our theme of Mid-Cap SaaS Stocks, we’ve picked SaaS players with a market cap of under $10 billion that have posted robust revenue growth over the last two years. We believe that these stocks have scope for better returns compared to large-cap software names in the long run while being less volatile compared to small-cap stocks. Although the theme is down by about 9% year-to-date, compared to the S&P 500 which is up by about 11% over the same period, the theme gained about 120% since the end of 2017.

Within our theme, PagerDuty, a company that provides a SaaS incident response platform for IT departments that helps teams detect and fix infrastructure problems, has been the best performer, rising by about 2% year-to-date. On the other side, Alteryx, a company that provides analytics software, has seen its stock decline by about 30% this year, driven by a weaker than expected outlook for this fiscal year and the company’s exposure to on-premise sales, which has been slowed down due to the pandemic.

[2/2/2021] Mid-Cap SaaS Stocks

Software as a Service (SaaS) stocks were among the biggest winners post the Covid-19 stock market crash in March 2020 and it’s likely that the sector will remain in favor even after the pandemic ends, given the increasing digitization of business and a continued shift to distributed enterprises. Our theme on Mid-Cap SaaS Stocks includes software players that have shown strong revenue growth and consistent margin expansion and are trading at a market cap of under $10 billion. The theme is up by about 5% year-to-date, compared to the S&P 500 which has remained roughly flat year-to-date. Within the theme, PagerDuty, a company that provides an incident response platform for IT departments, has emerged as the strongest performer, rising by about 21% year-to-date. On the other hand, Mimecast, a company that sells cloud security and risk management services for email and corporate data, has underperformed, declining by about -22% year-to-date.

[12/30/2020] Mid-Cap SaaS Stocks

Software stocks have fared well this year, driven by a couple of factors. Firstly, the work from home trend and accelerated digital transitions by businesses has helped to boost demand. Secondly, with interest rates remaining low, investors have been paying a premium for growth stocks. Thirdly, SaaS (software-as-a-service) business models are driven by stable, recurring Revenues and this has resonated well with investors through the economic uncertainty of Covid-19. In our theme Mid-Cap SaaS Stocks, we have picked a few SaaS players with a market cap of under $10 billion that have performed well in recent years. With strong revenue growth and consistent margin expansion, these companies could be poised to outperform in the long-run. Below is a bit more about the key companies in our theme.

Workiva offers cloud-based solutions for enterprises to collaboratively collect, manage, report, and analyze business data in real-time across areas such as finance, accounting, and compliance. The stock is up 116% this year.

PagerDuty provides a SaaS incident response platform for IT departments that helps teams detect and fix infrastructure problems quickly. The stock is up 85% this year.

RealPage offers software-as-a-service solutions for property and real estate management. The stock is up 62% this year.

Mimecast develops cloud security and risk management services for email and corporate data. The stock is up about 30% this year.

New Relic develops cloud-based software that helps web and app developers to track the performances of their services. The stock is down about 2% this year.

See our theme on Mid-Cap SaaS Stocks for more details on the companies in the theme and their fundamental performance in recent years.

[Updated 6/19/2020] Mid-Cap SaaS Stocks

Software-as-a-service (SaaS) has emerged as one of the hottest investing themes in the tech sector driven by two broad trends. Firstly, the Covid-19 pandemic is forcing businesses to speed up their digital transitions, improving productivity and collaboration as people increasingly work from home. Secondly, SaaS companies are largely subscription-based, with a recurring revenue stream that could make them a relatively stable bet during times of uncertainty. It’s likely that the crisis will cause a structural shift, benefiting these stocks well past the pandemic.

Most large-cap SaaS stocks have rallied considerably this year, and valuations look somewhat stretched. However, we’ve done some analysis and picked a few mid-cap SaaS players (market cap of under $10 billion) that have appreciated by less than 20% this year despite posting strong revenue growth and expanding margins over the last 2 years. Our dashboard Trefis Theme: Mid-Cap Software-As-A-Service Stocks provides an overview of the fundamentals of 5 mid-cap SaaS stocks. A part of the analysis is summarized below.

Cloudera ($3.7 billion market cap, +9% YTD) sells data warehousing, data engineering, machine learning, and analytics software solutions to enterprises. While the company beat expectations over Q1, with subscription revenues growing by about 21% year-over-year, the stock has come under some pressure as its Q2 guidance fell slightly short of consensus. That said, the stock trades at about 4.7x trailing revenues, which is relatively attractive for the SaaS space considering its positive operating margins and high revenue growth (113% between 2017 and 2019, including acquisitions). The company is also viewed as a potential acquisition target.

Paylocity ($7 billion market cap, +10% YTD) provides cloud-based payroll and human capital management software that focuses on small and medium businesses. While the company’s business could face some headwinds due to the tough economy and high unemployment rate, its fundamentals are strong, with revenue growing by about 25% annually over the last two years. Moreover, the margins have been expanding quickly, from negative levels in 2016 to over 12% as of 2019. The stock trades at about 15x trailing revenues.

Altair ($3 billion, +7% YTD) provides software and cloud solutions for product design and development, high-performance computing, and data analytics. While the company’s revenues have grown at an annual rate of over 15% over the last two years, things could prove challenging in 2020 on account of the company’s significant exposure to the engineering and construction industries, which are likely to be badly impacted by the Covid-19 pandemic. The stock trades at about 6.1x, slightly below some other stocks in the group considering the mixed revenue outlook and the fact that margins have been slightly volatile.

New Relic ($4 billion, +3% YTD) develops cloud-based software that helps web and app developers to track the performances of their services. While the company’s operating margins have been improving, rising from around -23% in FY’18 to -7% in FY’20, the company expects earnings to decline this fiscal due to higher investments as it transitions to a new solution called New Relic One that unifies the company’s various offerings. The stock trades at about 8.5x trailing revenues.

Mimecast ($4 billion, +3% YTD) develops cloud security and risk management services for email and corporate data. The company’s business should get a boost from the current pandemic, as the work from home trend causes companies to invest more in security software. The company’s historical growth has been strong, with revenues expanding by 25% each year over the last two years, with operating margins also recently turning positive. The stock trades at about 6.5x trailing revenues.

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