SaaS, or software as a service, was popularised by United States customer relationship management (CRM) giant Salesforce.com inc. It is a business model under which customers pay to use software hosted on a remote computer. Today, partly due to the proliferation of cloud technologies, some of the fastest growing ASX shares are SaaS companies.
Characteristics of ASX SaaS shares
Xero Limited (ASX: XRO) is arguably the ASX’s most well known SaaS share. It operates an online accounting platform, among other services, principally for small to medium enterprises. Xero is currently valued at $13.14 billion. For context, Santos Ltd (ASX: STO) is valued at $10.89 billion. The meteoric rise of the Xero share price over the last couple of years is largely due to the likely revenue growth the market has priced in.
To illustrate further, according to a Gartner Group in November last year, the total global revenues from cloud-based services was estimated to reach $266.4 billion in 2020, up 17% from 2019.
SaaS companies have a number of characteristics I find very appealing. First, most of their revenue is recurring and follows a subscriber-based business model. Second, costs to subscribe are comparatively low. Therefore, if the product works well and the customer service level is high, there is little motivation for customers to change platforms. Third, once the product reaches a mature stage, the company makes a high operating margin.
Infomedia Limited (ASX: IFM)
Infomedia is an interesting small-cap SaaS share. It is a profitable company, has a global footprint, and currently trades at a price-to-earnings (P/E) ratio of 32.24. From 3 January 2010 until last Friday, the company’s share price grew approximately 18% per year on average.
Infomedia provides a range of products to automotive service companies. For example, its software includes an electronic parts catalogue, a service-selling product, a lubricant selection product, and a CRM.
The company has 180,000 users across 186 countries and 80% of its revenue is from outside Australia. Greater than 95% of the company’s revenue is recurring and its ten year average operating margin is 43%.
This company is on my watch list.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is a New Zealand-based, ASX-listed donor management system. However, most of its customers are in the United states. The company has a market cap of $2.41 billion with a P/E of 93.3. It is profitable and has clearly had a significant growth trajectory to date.
The company provides donor and congregation management systems predominantly for churches. Nonetheless, some non-profit organisations and education providers also use its products.
Pushpay operates web-based software linked to mobile apps, which take subscription fees as well as transaction fees. The company processed an amazing US$5 billion in total processing volumes for the year ended 31 March 2020. In addition, it increased operating revenue by 33% to US$127.5 million while increasing gross margin from 60% to 65%.
Pushpay is also on my watchlist.
Whispir Ltd (ASX: WSP)
I find Whispr to be a very interesting company. Unlike the other two SaaS companies discussed, it is not yet profitable and is aggressively pursuing growth. Whispir provides a communications platform between organisations and people across a whole range of content. It produces 1.5 billion transactions each year.
The company has many clients across a very diverse spectrum of Australian industries. To illustrate, some of these include Transport for NSW, RACQ, APA Group (ASX: APA), Roy Hill, and the country’s number one health booking app, Health Engine.
On 26 March, Whispir announced the Victoria Department of Health and Human Services would be using the company’s products as part of its COVID-19 communications.
Whispir reported a growth in its annual recurring revenue stream of 22% against the previous corresponding period in its H1 FY20 report. As with other SaaS companies, it has a high gross operating margin of 62%, and recurring revenues make up greater than 95% of its income.
Whispir interests me on a few levels. First, the ‘sticky’ nature of subscriber models and the company’s high operating margins. Second, I believe the massive diversity in the company’s customer base indicates a real versatility, and a genuine growing demand for the product.
In addition to those mentioned above, I’m also interested in many other ASX SaaS shares. For example, companies like WiseTech Global Ltd (ASX: WTC), TechnologyOne Ltd (ASX: TNE), and HR software ELMO Software Ltd (ASX: ELO) are all on my radar. However, I chose to focus on the three companies above due to the fact they have taken the SaaS model into entirely new areas, not just enterprise management.
Furthermore, all three are pursuing growth, have characteristically high operating margins, and appear to have a lot of open space left to grow into.
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Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Infomedia, PUSHPAY FPO NZX, Whispir Ltd, and Xero. The Motley Fool Australia owns shares of WiseTech Global. The Motley Fool Australia has recommended Elmo Software, PUSHPAY FPO NZX, and Whispir Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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