New investors get excited by tech stocks because you use their products on a daily basis. Facebook (FB), Snapchat (SNAP), and Netflix (NFLX) are familiar faces, but this weekend we're going to look at more boring tech. Forget AI, VR, and every other acronym. We're going to talk about enterprise software that you may have never touched and may never will... but could make you money.
*Quick note, check out the new section at the bottom of the newsletter reviewing last week's stocks.
The three stocks I’m watching this week are Salesforce.com, Inc. (CRM), Alteryx, Inc. (AYX), and ServiceNow, Inc. (NOW).
☁️ Salesforce.com, Inc. (CRM, $155.49, +11.8%)
Ask any business greater than 50 employees what system they use to manage sales, and there's a very high chance it's Salesforce. Salesforce is famous for pioneering the software-as-a-service (SaaS) model with its Customer Relationship Management (CRM) product. Since then, the empire that Salesforce has built is one of the best growth stories in software.
What to look at.
Extraordinary Moat for SaaS: Salesforce absolutely dominates the salesforce automation space with 33% market share, making it very difficult for any competitor to come near them.
High Switching Costs: These are costs associated with changing products, often lower in SaaS software. In Salesforce's case, their leading solution and the high risk of moving mission-critical data has led to 92% renewal rates in 2019.
Small Business Exposure: Salesforce sells to small-to-medium businesses (SMB) to fuel its growth. This exposes them to SMBs going out of business or not paying, a factor in COVID-19 affecting their stock price.
Growing Revenue, Growing Market: Salesforce’s stock will increase as long as they keep growing revenue. Their total addressable market, or the amount of value they can capture from current and potential customers, is set to grow to $143B by 2022. Their revenue is set to grow at 18% over the next five years.
Why I’m watching it.
The universal choice of CRM for all salespeople is Salesforce, no questions asked. The dominance that they display in their market is unrivaled with a competitive moat that other SaaS companies can only dream of. At the current price, the stock’s fair value is estimated at $202* (an upside of 30%). The risk of investing in Salesforce is that their investors expect growth above all else. If they can’t grow revenue through sales, new product lines, or buying companies, their stock will be impacted. As of now, I think there’s many years of growth ahead of them, and the current drop in price for software stocks presents an opportunity to buy.
📊 Alteryx, Inc. (AYX, $107.92, +24.7%)
The Irvine-based (shoutout to the hometown) software company provides a self-service data analytics software primarily to huge companies like Coca-Cola, Dell, and Audi. These companies use Alteryx products to analyze data about their business and use it to manage and improve their operations.
What to look at.
Strong, Profitable Growth: AYX has grown at an incredible pace over the past 3 years, nearly 70%. At the same time, they run profitably, operating at a 9% margin. For fast-growing tech companies, this is stellar performance.
Competitive Market: AYX has estimated their total addressable market at $77B. At $420MM in revenue, they have only captured 0.5% of their potential market. Competition from many other companies like Microsoft could put pressure on AYX's sales growth.
Very High P/E Ratio: The price/earnings (P/E) ratio is how many dollars an investor is willing to pay for a share per dollar of the company's earnings. A higher P/E ratio means that investors expect much higher earnings and are willing to pay a premium for it. At a P/E ratio of 270, investors are giving AYX a very high premium for growth.
Why I’m watching it.
AYX is a great growth stock for the young investor. They have an impressive track record of double-digit growth in the past 4 years, while also remaining profitable. They are currently down 32.6% from their 52 week high price of $160.11, making now a good opportunity to buy. A relatively younger company in a crowded space, AYX has done considerably well, however investing in them comes with risk. They will need to continue their growth while fending off larger competitors to sustain their current premium price. I believe AYX is a solid short-term growth opportunity, but may not be a long-term investment.
🔧 ServiceNow, Inc. (NOW, $278.06, +7.5%)
IT is the biggest pain for most big enterprise companies. The simplest IT task such as resetting your password can lead to a string of emails in finding the right person with the right credentials. ServiceNow’s SaaS product automates IT workflows, allowing enterprises to easily perform such tasks across different software platforms.
What to look at.
Land and Expand Strategy: NOW focused their product on IT service management (ITSM) and gained 40% market share in that areas. After gaining a foothold in a company with ITSM, they then grow to other areas. 80% of their customers are now multi-product purchasers.
Retention of Enterprise Customers: NOW exclusively serves large enterprise customers, with no small business exposure. This has led to 98% retention rates with nearly half of the largest 2,000 companies in the world.
Strong Product Positioning: Rather than competing with Salesforce for CRM, or Oracle for finance, NOW’s solutions sit on top and interface with all these platforms. This is powerful because enterprise customers need to maintain legacy systems while pushing for more modern technology.
Impressive Trailing Returns: Compared to the software market average 5-year return of 16%, NOW has an extraordinary return of 27.7% for the same period.
Why I’m watching it.
ServiceNow is a juggernaut of a software company. Integrating an enterprise's critical software platforms makes their customers heavily reliant on them. That retention, plus projected 5-year growth of 25%, has analysts estimating their stock’s fair value at $370*. An exclusive focus on enterprises lowers the risk of investing in NOW, as their customers will weather economic downturns. Their recent leadership change, with former SAP CEO Bill McDermott taking over, bodes well for future growth. Under McDermott's tenure, SAP tripled its market value to ~$140B and successfully transitioned to the cloud.
Last Week’s Stocks
You can review why I picked these stocks last week here.