Stock Watch

Software growth stocks: 3 small and large cap SaaS firms beating expectations

Investors just can't get enough of software growth stocks right now. Irrespective of size, companies in this sector have experienced large share price movements as investors look for software stocks with huge growth potential.

Take Domo Inc. The company is just starting out but has shown impressive growth since the start of the year. Among mid-range software companies, maturing Hubspot looks like it could have a bright 2019 after a solid 2018. Then there's Playcom - an established large cap that's still showing impressive growth.

But can these companies sustain recent gains or is this bubble about to pop?

 

Domo Inc

In its 2018 full year results, software as a service (SaaS) company Domo [DOMO] saw a 26% year-on-year increase in billings and an impressive 31% jump in revenue. Domo, which supplies business intelligence software, was also able to streamline operations by making an 11% cut to sales and marketing expenses.

Yet after last year's June IPO it saw its starting share price of $23.80 sink 28.1% to trade at $19.63 by the end of the year.

 

Market cap$1.02bn
Forward PE ratio-13.68
EPS (TTM)-9.43
Total Debt/Equity (MRQ)218.40

Domo Inc stock vitals, Yahoo finance, as at 15 April 2019

 

Things have picked up since then, with the share price up an incredible 109%. Driving this resurgence has been Domo's ability to increase customers with more than $1 billion in revenues.

The global SaaS market is expected to be worth $185.8bn by 2024, at a CAGR of 21.4%. As more companies invest in SaaS applications, Domo could continue to see its share price soar.

 

Hubspot

Marketing automation supplier Hubspot's [HUBS] fourth quarter results outpaced its own predictions with a 35% growth in revenue from the previous quarter.

35%

MRQ growth in revenue since previous quarter

Driving growth have been Hubspot’s efforts to cross sell its own software and the targeting of larger enterprise accounts.

This stellar performance has seen the stock shoot up 40% since the start of the year, with Hubspot giving investors reason to believe that the run could continue.

Looking ahead, the company expects first quarter 2019 sales of between $146.5 million to $147.5 million, which would be a 28% year-on-year increase. Earnings per share is expected at between $0.23 to $0.25, which would be a huge 60% gain over the same time period.Hubspot 1-year share price performance, CMC Markets, as at 15 April 2019

 

The general consensus from analysts is a ‘buy’ rating for the stock, with none rating it a sell. The stock is also heavily backed by institutional investors including Vanguard and BlackRock, with around 95% of the stock held by institutional investors.

Investors will need to decide how justified this backing is as there is a danger that 2019's guidance has been priced in, limiting potential gains.

 

Paycom

Online payroll and HR software supplier Paycom's [PAYC] solid financials could mean a share price is on the cards.

Over the past 12 months, Paycom has been able to keep debt at the $34m level. All the while it has substantially increased its own net worth (current market cap is around $11bn). Operating cash flow has also increased in the period, meaning that the stock’s operating cash-to-total-debt ratio comes in at an impressive 537%.Paycom 1-year share price performance, CMC Markets, as at 15 April 2019

 

Paycom's balance sheet doesn’t look like it is taking on too much debt. While this could potentially limit short-term growth, it should stand the company’s long-term prospects in good stead. Its EBIT ratio is 1755x the size of net interest, so it has ample cash flow to cover any interest payments.

Since the start of the year, Paycom's share price is up a solid 57.69%. Year-on-year, the stock is up an even more impressive 71.66%. The next big test for the stock will be when first quarter 2019 results come out on 30 April.

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