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Unlocking Wealth: Investing in Promising SaaS Stocks
Understanding the “software-as-a-service” (SaaS) industry is important, as it features numerous high-performing businesses. Some are well-known giants, while others are emerging startups.
In simple terms, a software-as-a-service company provides access to valuable software for businesses and consumers without needing to host it on their own premises. Instead, this software operates in the cloud. For example, companies utilize SaaS products to oversee payroll, manage clinical trials, or analyze data.
Image source: Getty Images.
Turning Investment into Wealth
How can one potentially become a millionaire with SaaS stocks? The approach is similar to investing in any stocks—putting in capital, ideally in significant amounts over time, and allowing companies to appreciate in value. Historically, the S&P 500 index has yielded close to 10% annual gains over many decades, while several SaaS firms have surpassed that growth rate.
The following table illustrates how your investment could perform at both 10% and a more ambitious 15% growth rate:
|
$10,000 invested annually and growing for |
Growing at 10% |
Growing at 15% |
|---|---|---|
|
10 years |
$175,312 |
$233,493 |
|
15 years |
$349,497 |
$547,174 |
|
20 years |
$630,025 |
$1,178,101 |
|
25 years |
$1,081,818 |
$2,447,120 |
|
30 years |
$1,809,434 |
$4,999,569 |
|
35 years |
$2,981,268 |
$10,133,457 |
|
40 years |
$4,868,518 |
$20,459,539 |
Source: Calculations by author.
Keep in mind that your actual annual returns may vary based on the stocks or indexes you invest in, and your gains could exceed 15% or fall below 10%. There are no guaranteed returns.
Let’s look at three SaaS companies that might be worth considering for long-term investment, based on their promising business prospects and reasonable valuations.
Top 3 SaaS Companies Worth Watching
|
Company |
Market capitalization |
Recent quarterly revenue growth, year over year |
Net profit margin |
Forward price-to-earnings (P/E) ratio |
|---|---|---|---|---|
|
Block (NYSE: SQ) |
$44 billion |
11.2% |
2.9% |
15.4 |
|
Veeva Systems (NYSE: VEEV) |
$35 billion |
14.6% |
23.9% |
32.1 |
|
Zoom Video Communications (NASDAQ: ZM) |
$22 billion |
2.1% |
19.1% |
13.6 |
Source: Yahoo! Finance as of late October, 2024.
1. Block
Block operates in fintech as a parent company for brands like Square, Cash App, TIDAL, and TBD. Square facilitates transactions while Cash App allows users to send, spend, or invest money. Positioned for growth in digital payments, both domestically and internationally, Block is also expanding its services to attract and retain customers, although some investors are eager to see improved profitability.
2. Veeva Systems
Focusing on the life sciences sector, Veeva Systems provides cloud-based services that help pharmaceutical companies manage clinical trials. With over 1,000 clients, including major pharma and biotech firms, Veeva’s subscription model ensures consistent, recurring revenue. Its growth strategy involves entering new niches like medical devices and consumer products.
3. Zoom Video Communications
Zoom has become immensely popular for video conferencing, with millions using its platform regularly. Beyond video calls, it offers AI features through its Zoom Workplace and several other business services. Although it saw rapid growth during the pandemic, Zoom is now concentrating on re-energizing its growth. Many users acquired during the pandemic continue to engage with the platform, allowing the company to offer them additional services.
Exploring Further Opportunities
Among the SaaS companies mentioned, which ones should you consider investing in? While each has potential, their future performance remains uncertain. It may also be worth looking into diversified giants like Alphabet and Microsoft, which have significant SaaS operations bolstered by expansive cloud platforms.
Remember, successful investing often requires careful research and ongoing evaluation.
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Exploring Investment Choices: Should You Go for Block or Broaden Your Horizons?
Alternative Investment Strategies Beyond Individual Stocks
If you want to invest in technology without picking single stocks, consider the benefits of a Software as a Service (SaaS) exchange-traded fund (ETF). Options to explore include the Fidelity Cloud Computing ETF (NYSEMKT: FCLD), the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV), and the broader iShares US Technology ETF (NYSEMKT: IYW).
Analyzing a $1,000 Investment in Block Today
Before committing funds to Block, it is critical to take a step back and evaluate the situation:
The Motley Fool Stock Advisor team recently compiled a list of what they deem the 10 best stocks to invest in at this moment. Notably, Block was excluded from this selection. The stocks that made the list hold potential for significant returns in the years ahead.
For instance, consider the case of Nvidia, which made the same list on April 15, 2005. A hypothetical investment of $1,000 at that time would now be worth an astounding $829,746!*
Stock Advisor offers a structured approach for investors, featuring guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. Since its inception in 2002, the Stock Advisor service has achieved results that more than quadruple the average returns of the S&P 500.*
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*Stock Advisor returns as of October 28, 2024
Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Selena Maranjian holds shares in Adobe, Alphabet, Block, Microsoft, and Veeva Systems. The Motley Fool recommends and maintains positions in Adobe, Alphabet, Block, DigitalOcean, Microsoft, Veeva Systems, and Zoom Video Communications. Recommendations also include long January 2026 $395 calls and short January 2026 $405 calls on Microsoft. The Motley Fool follows strict disclosure policies.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
