The sale of software-as-a-service (SaaS) stock may create a productive buying opportunity for the team. At least this is the view of Thoma Bravo, who is widely regarded as one of the top independent investors in the SaaS space. It has acquired many independent SaaS companies over the years, and currently owns 80 software companies.
In a recent presentation, Thoma Bravo noted that the fundamentals of SaaS stocks have deviated from their valuations. It noted that fundamentals are improving with about 20% annual SaaS growth expected over the next few years. Meanwhile, SaaS companies in the S&P 500 they grow their capital at three times the rate of companies in other industries while having much higher revenues.
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That said, Thoma Bravo’s launch was not a complete defense of the entire industry. It argues that not all software companies are the same and that some will end up being disrupted by AI. However, the company believes that SaaS companies with deep domain expertise will be the winners in the age of AI.
Although Thoma Bravo did not identify any of these potential winners, let’s take a look at three who fit the bill.
When it comes to deep domain technology and a company tightly integrated with its customer data and workflow, Service Now (NYSE: NOW) you are a good example. The company is deeply embedded within IT departments, where its solution helps manage networks and support functions, while integrated in other areas, such as human resources and customer service, with workflow automation and digital processing tools.
The company is also embracing AI, both through its rapidly growing AI solutions suite, Now Assist, and the recent launch of its AI agent orchestration platform, Control Tower. ServiceNow is still growing revenue at a 20% clip, and the selloff in the stock has reduced its valuation to an attractive price-to-sales (P/S) multiple of less than 7 times and a forward P/E of 25 times.
Salesforce (NYSE: CRM) another SaaS company that is a leader in its field with strong domain expertise in the area of customer relationship management. The company has also focused heavily on its customer data and has been a key tool to help break down departmental data silos to give customer service departments a single view.
The company, however, has taken this to the next level with its introduction of Data 360, which can see and use data from third-party cloud providers and data warehouses without moving it. Meanwhile, its recent acquisition of major data management company Informatica allows it to clean and standardize this “dirty” external data. All of this helps set the company up to be a leader in agent AI, as AI agents are only as good as the data they are fed.
Despite Salesforce being in good shape with Agentforce and the company projecting strong double-digit revenue growth over the next few years, the stock trades at a forward P/S ratio of just 3.7 times and a forward P/E of 14 times, making it highly profitable.
Work day (NASDAQ: WDAY) is the leading financial and human resource management platform with human resources (HR) and financial data. However, it’s those commitments to HR that have made it one of the most penalized stocks this year, with its shares down nearly 40% year to date, as of this writing. That left it at a bargain-basement multiple of about 3 times forward P/S and 12 times forward P/E.
However, Workday is still growing its revenue with a strong number of new, and dependent on AI and AI agents for several product offerings, including Recruiting Agent, Contract Intelligence Agent, and Skills Development. And while there is a risk of companies hiring fewer employees, I think most SaaS companies will eventually shift to usage or results-based pricing models. Labor Day is always a strong business, and the stock is just way, way too cheap right now.
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Geoffrey Seiler holds positions at Salesforce and ServiceNow. The Motley Fool has positions and recommends Salesforce, ServiceNow, and Workday. The Motley Fool has a policy of disclosure.
Why SaaS Sell-Offs Create Buyback Opportunities was originally published by The Motley Fool.
