Cloud-based software has taken off in recent years with cloud powerhouses like Amazon AMZN, Microsoft MSFT, Oracle ORCL, and Adobe ADBE, paving the way for smaller firms to come in and fill the market gaps in this accelerating category. Enterprise cloud software is a space that has a massive amount of growth opportunity as digital enterprise management becomes a necessity to compete in any industry.
Salesforce, a pioneer in enterprise management software, continues to prove that this cloud-based model is on fire. The company released its July quarter earnings after the bell Thursday (8/22) and exceeded analysts’ expectations for both earnings and sales. The stock is up roughly 8% in the last week of trading.
Salesforce is the largest cloud-based enterprise software firm in the market. Their positive performance is an implication to the entire business software market. Below I will discuss a few smaller less-known businesses in the field that could provide some positive returns in your portfolio.
HubSpot has been on a tear showing investors over 60% growth so far this year. Analysts have been raising estimates on HUBS propelling it to a Zacks Rank # 2 (Buy).
HubSpot provides companies with software as a service (SaaS). It delivers cloud-based businesses services with its segments, including Marketing Hub, Sales Hub, Service Hub, and a free CRM system.
HubSpot’s goal is to create a seamless customer experience that allows businesses to “grow better”. Their target customers are small to medium-sized businesses with tremendous growth potential.
Since HubSpot went public 5 years ago, it has been able to illustrate consistent year-over-year and quarter-over-quarter topline growth with a compounded annual growth rate (CAGR) of 42%. HUBS international sales growth outpaces domestic at 62% CAGR.
HUBS forward P/S multiple has continued to balloon as its business model is gradually proven to investors and expected growth potential is appreciating. This stock is by no means cheap but that doesn’t mean that this couldn’t provide you with significant returns.
PagerDuty went public in April of this year during the IPO frenzy in H1, and the stock has had a wild ride. PD’s IPO price was $24 then immediately jumped to $38.25 when it hit the public markets trading up to the $59 in June and is now trading at $35.60.
PagerDuty provides customers with a one of a kind business model that leverages digital signals to report incidence within a firm’s digital infrastructure that needs to be addressed. PagerDuty then “enable customers to orchestrate the responsible team members across developers, IT, security, support, and other business functions,” according to its prospectus. AI and machine learning are used to improve this process for each customer continuously.
This company has experienced quarter-over-quarter topline growth for over two years and is expected to continue growing its topline 38% this year and 29% the next along with margin expansions.
PagerDuty is one of those investments where you have to believe in management and their product to take a share in this unproven business model. This is a very niche business that if properly executed, could yield substantial returns.
Subscription-based cloud software is the new tech gold standard that enables companies to seemingly “printing money”. Quarter-over-quarter growth allows investors to be comfortable with absurdly high multiples. Enterprise cloud technology has a lot of growth potential as more firms transition to a digitalized infrastructure. This is becoming a necessity to compete in the digital age.
HubSpot and PagerDuty haven’t yet turned a profit, but they have a bright future if can execute their business model effectively.
The cloud space has also been experiencing a vast amount of consolidation as bigger players recognize market gaps that need to be filled. This could provide a massive upside to investors in the smaller cloud players.
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