Software-as-a-Service (SaaS) businesses are growing in popularity as they offer consumers greater efficiency for an affordable price. Class Ltd (ASX: CL1) and Xero FPO NZX (ASX: XRO) are two in the accounting space.
Automation and efficiency gains are dramatically changing the accounting & bookkeeping world. When a large amount of the menial work can be reduced, it can add a lot to the productivity of each person. This has made Class's self managed super fund software and Xero's accounting software very popular.
Class has a market capitalisation of $370 million, whereas Xero is much bigger at $2.3 billion. However, being bigger doesn't necessarily mean it's the better choice. How the shares perform is the important factor.
Class shares have grown 124% since it listed in December 2016, whereas Xero shares are trading at virtually the same price as 11 months ago.
Which one would make the better investment today?
Subscriber growth
Both businesses are experiencing tremendous growth. Class grew its billable portfolios by 30,618 clients during FY16, which was an increase of 37%. Xero grew its subscribers by 45% from September 2015 to September 2016 to end with a total of 862,000.
Any business would be pleased with that level of growth of customers in one year.
Revenue growth
Of course, the revenue has grown strongly with the subscriber growth. Xero grew its operating revenue by 48% in the half year to September 2016.
Class grew its operating revenue by 45% during FY16 to $22.6 million.
Profit growth
This is one of the main differences between the two businesses. Class is growing its profit rapidly, during FY16 net profit after tax grew by 71% (before one off transactions) to $5.8 million.
Xero hasn't yet turned a profit. In the half year to September 2016 its earnings before interest, depreciation and amortisation improved to a loss of $25.9 million from $33.8 million. Xero is getting closer to a profit each period, but it's not there yet.
Dividends
Xero doesn't pay any dividends and probably won't for a long while.
However, Class has been paying dividends since it listed. Class increased its dividend by 67% during FY16 and it's expected to pay fully franked dividends from December 2016. It's currently trading with a dividend yield of 1.26%.
Is either worth a buy?
There's a lot to like about Xero, but I'm hesitant to buy a business that's still making losses and not paying dividends.
For me, Class is the superior investment of the two. It's currently trading with a price/earnings ratio of 68, but considering how strongly it's growing (and expected to grow), Class is definitely one stock that's on my watchlist.
Class's share price is currently at $3.17, if it goes below $3 then I'll be very interested.
