The software-as-a-service sector has exploded in popularity over the past several years. And 2020 was no exception.
According to a recent report, between 2020 and 2021, SaaS sales grew from $6 billion to over $272 billion at a CAGR of 20.8%.
While some of this growth can be attributed to the impact of Covid, with widespread closures, social distancing measures, and the shift to remote working, SaaS sales are still expected to top $436 billion by 2025.
Innovative new companies are flocking to the SaaS business model. Massive growth potential in this market suggests investors looking to the technology sector for opportunities should be paying very close attention to SaaS stocks.
What is SaaS?
Software-as-a-service provides an alternative software delivery model where products are licensed via subscription or pay-per-use rather than bought outright. Customers have access to cloud-based software solutions; however, until traditional software, SaaS subscribers benefit from regular updates, full support, and additional features.
Recurring payments
With a SaaS business model, customers do not buy the hardware; rather, they are provided software services on various subscription or pay-per-use-based plans. Users gain access to premium service features at a lower upfront cost, while companies benefit from regular cash inflows instead of one-time purchases.
Heightened Focus Customer Retention
Customer retention is crucial for a SaaS provider. Companies spend a significant amount of money on customer acquisition, but unlike a single hardware purchase, SaaS companies cannot count subscription fees as revenue until services have been provided because users have the option to cancel at any time. It can take several months before CACs are recouped under the SaaS business model, which makes ensuring customers remain with the service, at least for their agreed-upon term, is extremely important.
However, clients who renew subscriptions or do not cancel, for more extended periods, lower the average CAC help generate a higher ROI.
Consistent updates
One of the preferred features of the SaaS model is regularly occurring updates. Rather than releasing a next-generation software version, SaaS companies can introduce new features or push minor, more frequent updates as needed. This model allows SaaS providers to respond quickly to shifting market demands and the latest trends while keeping service consistent and user retention high.
Tech investors and venture capitalists have been pumping money into SaaS companies as they race to find the next Zoom or Snowflake. According to an internal Silicon Valley Bank report, valuations for cloud-based software-as-a-service startups have climbed as much as 40% in a little over a year.
But what is it about SaaS companies that return-hungry investors can’t get enough of?
First and foremost, VCs aim to generate the largest returns with the smallest investment. SaaS companies are exceptionally efficient in this regard as the model can provide predictable, reoccurring annual revenue with lower capital expenditure than most other types of non-SaaS companies.
Once established, SaaS startups can continue to add more and more users without a substantial increase in their fixed costs, potentially leading to very attractive gross margins as companies expand.
It’s also easy to add users to a SaaS model. Because prices are affordable and cancellation is simple, customers may be more inclined to try a substruction service without the risk of purchasing a product outright. Once hooked, upselling to existing customers offers SaaS companies another avenue to increase revenue with virtually no additional expenditure.
SaaS stocks have benefited from an exponential rise in investor interest and have witnessed explosive growth, generating very attractive returns over the past few years.
One SaaS stock we love is TraceSafe Inc. (CSE:TSF).
TraceSafe improves safety and operational efficiency for enterprises of all sizes with its lineup of intelligent, connected IoT devices. Capable of large-scale, customizable deployment, the Company’s unique SaaS platform can be cost-effectively manufactured to meet the demands presented by even the most challenging environments.
The platform is fully integrated with existing systems, allowing clients to centralize safety, track assets, provide employee and guest services, resource planning, and other IoT microservices in one dashboard with no third-party software required.
While their contact tracing capabilities proved invaluable throughout the Covid pandemic, post-Covid, the Company has expanded its services into several new markets.
Recent company updates include:
Disclaimer: The company described in this article is a customer of NAI Interactive Ltd. This material is for informational purposes only and is not intended as a recommendation or offer or solicitation for the purchase or sale of any securities or financial instruments, or for transactions involving any financial instrument or trading strategy.
