first published on 12 Nov 2021, updated 30 Dec 2021
SaaS stocks have been on a roll for years, and despite having sky-high valuations, they continue to break new highs. This is a true testament of ‘what is high can go higher.’
Why is this happening? There are multiple factors. It could be due to the loose monetary policy in the US, or the remarkable growth in their financial figures, or the considerable growth prospect. It could even be a combination of all these.
It is hard to know the cause, and that’s okay. What is more important is that we benefit from it financially.
I prefer to use momentum as a criterion to catch some of these big moves. It has been great for momentum trades when these stocks are able to sustain the price gains over a long time.
That said, tech stocks suffered a hit recently as inflation fears rose and investors become fearful. Hence, momentum on many of these SaaS stocks is relatively low at the time of update, compared to when I first published this article.
I will share the top 10 SaaS stocks by momentum in this article. The universe of SaaS stocks was taken from Public Comps, and it is important to note that not all are truly SaaS. Examples of these are MongoDB and Snowflake, as they charge by usage rather than a fixed subscription fee. Nonetheless, I still included them because they have exhibited SaaS-like benefits such as scalability, recurring income and high retention rates.
Here we go!
#1 – New Relic (NEWR)
New Relic provides a cloud-based monitoring and debugging service for developers to help them identify bugs, keep their software functioning optimally and help DevOps teams to run smoothly.
New Relic is not a subscription service, instead they charge users based on the amount of data required, very much like Snowflake (which comes in at #4). They offer a free tier that gives users access to 100GB of ingested data per month, users are only charged if they require a greater volume of data, prices start at US$0.25 per GB of data.
This is enticing for developers and smaller businesses, however it may affect their ability to convert free users into paying users. Their Net Revenue Retention hasn’t been very impressive:
That said, New Relic’s revenue in 2Q22 was $196m, representing a growth of 18% as compared to revenue from the previous year.
Its momentum has been building up since 23 Aug 21 and its share price has grown by 50% in the past 4 months.
Using rules in the quality momentum trading strategy frees us from having to spend hours researching the fundamentals of a company or forecasting their growth. We then build a portfolio of high quality stocks and pocket profits as the stock prices grow. (p.s. I share how you can execute this in the markets in this live webinar)
#2 – Datadog (DDOG)
Most people would not have heard of Datadog because the company mainly serves software engineers. In fact, it particularly caters to a specific group: the engineers tasked to carry out DevOps.
I am not a programmer myself, so I know this can get complicated. The advantage is that my explanation would be easier for you to understand.
The development to deployment cycle has shortened tremendously today. Development means new features are being built. Meanwhile, deployment means launching the new features in the live environment where users can see them. The engineers taking care of the deployment have to check the work of developers and test them to make sure they do not crash the actual environment before launching them.
It used to take a long time to get a development work approved and deployed. But tech is moving faster now, and developers and operations have to work together (instead of against each other) to push new features regularly. Datadog is a service that enables this.
Datadog has also expanded to offer security, and now it has become DevSecOps.
Datadog’s 3Q2021 revenue was $270m, a 75% increase from a year ago.
The buy signal started on 12 Aug 2021, and the share price has gained 47% in 3 months.
#3 – Zscaler (ZS)
Security is a key concern for any business that is moving their operations online. You want your employees to be able to access your database anywhere, without worrying that your proprietary data or customer data would be compromised.
Zscaler is a security solutions provider that gives its users a peace of mind. It also provides its enterprise customers access to outcome-based visibility, control and analytics across the extended perimeter to protect against known and unknown threats. It is sometimes described as “Security-as-a-Service”.
Zscaler’s revenue in 1Q22 was $230.5m which is a 62% increase from the previous year.
It started gaining momentum on 10 Aug 2021 and has gone on to deliver 34% gain in the past 4 months.
#4 – Snowflake (SNOW)
Snowflake is a data management company.
In the digital world, we deal with troves of data, and there is an increasing need to manage this data and derive useful insights from it. There’s even a new career known as a data scientist!
Snowflake positioned itself as the ultimate data platform, as you can store everything in it. One centralised and coherent data storage means that everyone in the company can use the same source and minimise discrepancies. The software also makes it easier to share data among departments, so gone are the days where you need to chase an uncooperative colleague for data so you can do your work!
Revenue for the quarter was $272.2 million, representing 104% year-over-year growth.
The momentum picked up after a heavy price correction, and the buy signal happened on 8 Sep 2021. The share price went on to gain 17% in 2 months.
#5 – DigitalOcean (DOCN)
DigitalOcean is a cloud computing company that provides what is known as Infrastructure-as-a-Service (IaaS). DigitalOcean provides a range of services that allow businesses to build and scale their applications digitally.
As of 3Q2021, their revenue grew by 37% year on year to $111m.
DigitalOcean IPO-ed recently in March 2021, and the quality momentum strategy would usually not pick up this stock as it requires a longer period of data. That said, DOCN’s momentum in the short term began building up on 17 Aug 2021, delivering 64% growth for investors in the past 4 months.
Using rules in the quality momentum trading strategy frees us from having to spend hours researching the fundamentals of a company or forecasting their growth. We then build a portfolio of high quality stocks and pocket profits as the stock prices grow. (p.s. I share how you can execute this in the markets in this live webinar)
#6 – Zuora (ZUO)
Subscriptions allow businesses to build a steady stream of revenue as it grows its base of paying customers. But if businesses were to collect subscription payments manually, the process would be slow, tedious and may even turn off customers. Zuora helps businesses to automate the messy backend of collecting payments.
Zuora is a software company that specializes in subscription billing, providing its users with all the tools needed.
Zuora’s revenue for fiscal 3Q2022 was $89.2m, growing by 16% since the previous fiscal year.
Its momentum began building up slowly since 30 Aug 2021, delivering 11.7% growth for investors in the past 4 months.
#7 – Confluent (CFLT)
Confluent is a real-time analytics company. To understand how it works, try to picture running an online shop where orders are coming in fast during a promotion. In this scenario, how do you ensure your inventory is updated in real-time? Also, how would you manage a fleet of delivery vans and know exactly where they are at the moment? Confluent solves these issues.
Confluent’s revenue was $103m in 3Q2021, up 67% from last year.
It had its IPO on 24 Jun 2021, and the momentum only showed data recently because of its short history. The earliest buy signal was on 29 Oct 2021, and the price jumped 33% in just over a week.
#8 – Cloudflare (NET)
Cloudflare is a multi-faceted company. You can call it a content delivery network (CDN), an edge computing provider, or a cybersecurity service provider. Although it has notable competitors like Fastly and Amazon Web Services, Cloudflare is a leader in its industry.
Cloudflare’s revenue in 3Q2021 was $172m, a 51% increase from last year.
The buy signal happened on 8 Jul 2021, and the share price registered a 30.6% gain in 5 months.
#9 – MongoDB (MDB)
MongoDB is a unique kind of database. When you think about it, most databases have table-like structures. You input data into a spreadsheet and do computations, or use a pivot table to get the information from the data you want.
In contrast, MongoDB is a so-called ‘tableless’ database, and you don’t need to spend a lot of time designing the data structure. You can dump the data into it and retrieve what you need, when you need it.
Below is a diagram showing the difference between relational databases, which are in tables, and non-relational databases, which are ‘tableless’.
MongoDB is an open-source software, but the company also provides database-as-a-service to users for a fee.
Its 3Q2022 revenue was $226.9m, an increase of 50% from the previous year.
The trade signal started on 3 Sep 2021, and the share price has gained 37% in 3 months.
#10 – Workday (WDAY)
Workday is a cloud-based human capital management suite that combines HR and finance management in a single platform. It covers all aspects of HR including everything from hiring to managing current employees. All these are presented on a user-friendly interface with real-time visibility.
Its 3Q2022 revenue was $1.33b, an increase of 20% from the previous year. Taking into account that its revenues are above the billion dollar range, it is quite impressive for Workplace to grow at such a high rate.
WDAY’s momentum started on 29 Sep 2021, and the share price has gained 11% in 3 months.
Momentum works well on SaaS stocks
Momentum has worked well on these SaaS stocks, however we are experiencing a shift of momentum from tech stocks to commodity stocks at the point of update. However, momentum has also proved to be effective for trading other high-quality stocks that aren’t software or tech. The highest returning stock in my portfolio is a packaging company.
If you want to learn more, I will get into the QMT strategy in this session.
