The growing adoption of public and hybrid-based cloud-based services by enterprises to push digitalization across industries would increase SaaS demand substantially. In addition, SaaS solutions have been undergoing significant changes as emerging technologies are integrated to improve proficiency and intelligence across organizations.
Given the industry tailwinds, investing in fundamentally sound SaaS stock Vimeo, Inc. (VMEO) could be wise for potential gains. However, investors could hold Palantir Technologies Inc. (PLTR) and UiPath Inc. (PATH) and wait for a better entry point in these stocks.
The COVID-19 pandemic created a landscape that will continue encouraging innovation and technological adoption worldwide. It further positively impacted the SaaS industry, with several enterprises opting for cloud-based software platforms during the lockdown. Businesses adopted SaaS solutions to enable remote collaboration, productivity, and communication.
Cloud-based software solutions are increasingly becoming popular due to their cost-effectiveness, scalability, upgrades, and easy-to-use attributes. Organizations globally are turning to cloud-based SaaS services for their business needs, such as customer relationship management, human resources management, accounting, project management, and data management.
Furthermore, the growing integration of artificial intelligence (AI), machine learning (ML), and the Internet of Things (IoT) should create numerous growth opportunities for SaaS companies. Personalization & automation, augmenting security, and enhancing human capacity are possible outcomes of incorporating SaaS solutions and AI/ML abilities.
According to the latest forecast from Gartner, Inc., worldwide public cloud end-user spending is projected to reach $597.30 billion in 2023, up 21.7% year-over-year. Cloud computing propels the next phase of digital business as businesses pursue disruption through emerging technologies such as generative AI, Web3, and the metaverse.
Moreover, SaaS remains the largest segment of the cloud market by end-user expenditure. This year’s SaaS spending is expected to increase 17.9% from the prior year to $197 billion.
As per a report by Fortune Business Insights, the global SaaS market size is estimated to reach $808.21 billion by 2030, growing at a CAGR of 18.7%. The rise in the adoption of public cloud-based solutions, integration with other tools, and centralized data-driven analytics are primary factors contributing to the market’s growth.
While investors should hold SaaS stocks PLTR and PATH and wait for a better entry point in these stocks, fundamentally sound VMEO could be an ideal buy now for solid returns.
Let’s discuss the fundamentals of these stocks in detail.
Stock to Buy:
Vimeo, Inc. (VMEO)
VMEO provides video software solutions globally. The company offers video tools through a software-as-a-service model, which allows its users to create, collaborate, and communicate with video on a single platform. In addition, it provides over-the-top OTT streaming and monetization services, AI-driven video creation and editing tools, and interactive video tools.
On June 30, VMEO launched a first-of-its-kind AI-powered video creation suite. The company’s new AI tools enable users to record videos in one take and edit in seconds, including generating a script from a text prompt, recording your screen using a built-in teleprompter, and instantly delete any unwanted content like filler words and long pauses.
With the launch of an AI-powered video creation suite, the company might position itself for robust long-term growth and profitability.
On June 21, VMEO and Rev, the world’s most accurate speech-to-text platform, partnered to make video accessible. Rev would be powering auto-captions for VMEO’s half-million VOD and live videos daily, an integration that would automatically create accessible, searchable videos.
We’ve built the leading platform for elevating human expression,” said Ashraf Alkarmi, CPO at Vimeo, 2023 Fast Company’s World’s Most Innovative Company. “We continue to advance this mission by providing a seamless experience for storytellers to create meaningful videos that drive engagement and connection.”
He added, “As we continue to enhance our product for a global audience, partners that uphold standards as Rev does with unbiased accuracy are pivotal to us surpassing what’s possible for Vimeo.”
VMEO’s trailing-12-month gross profit margin of 76.60% is 54.5% higher than the 49.59% industry average. Likewise, its trailing-12-month asset turnover ratio of 0.71x is 43.4% higher than the 0.49x industry average.
For the first quarter that ended March 31, 2023, Vimeo Enterprise Booking increased 62% year-over-year, representing 14% of total Bookings. VMEO’s adjusted EBITDA came in at $3.20 million, compared to a negative $10.40 million in the same quarter of 2022. The company generated a positive free cash flow of 4.9 million during the first quarter.
Analysts expect VMEO’s revenue for the fiscal year (ending December 2024) to grow 5.9% year-over-year to $432.61 million. Additionally, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
VMEO’s stock has gained 10.1% year-to-date to close the last trading session at $3.83.
VMEO’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
VMEO has a B grade for Sentiment, Value, and Quality. It is ranked #6 of 25 stocks in the B-rated Software - SAAS industry.
Beyond what we stated above, we also have VMEO’s ratings for Stability, Growth, and Momentum. Get all VMEO ratings here.
Stocks to Hold:
Palantir Technologies Inc. (PLTR)
PLTR builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. The company’s software platforms include Palantir Gotham, Palantir Foundry, and Palantir Apollo.
On July 12, PLTR expanded its partnership with Carahsoft Technology Corp., The Trusted Government IT Solutions Provider®.
Under the deal, Carahsoft would serve as a Public Sector Distributor for PLTR, making the company’s Apollo Platform available to the Public Sector through Carahsoft’s reseller partners, GSA Schedule, NASA Solutions for Enterprise-Wide Procurement (SEWP) V, and additional State and Local contracts. This partnership should bode well for the company.
On June 7, 2023, PLTR and Panasonic Energy Co., Ltd., a Panasonic Group Company, a global leader in high-quality lithium-ion batteries, announced a multi-year partnership to deliver an operation “Smart Factory” for the Panasonic Energy of North America facility in Sparks, Nevada.
The agreement is expected to expand PLTR’s signature platform, including artificial intelligence and edge capabilities in the manufacturing space.
In terms of forward non-GAAP P/E, PLTR is trading at 76.86x, 226.2% higher than the industry average of 23.56x. Also, the stock’s forward EV/EBITDA multiple of 57.19 is 289.4% higher than the industry average of 14.69%.
PLTR’s trailing-12-month gross profit margin of 78.75% is 61.8% higher than the 48.66% industry average. But the stock’s trailing-12-month EBITDA margin and EBIT margin of negative 4.59% and negative 12.87% compare to the industry averages of 8.57% and 2.01%, respectively.
PLTR’s revenues increased 17.7% year-over-year to $525.19 million in the first quarter that ended March 31, 2023. Its adjusted income from operations grew 24% from the year-ago value to $125.11 million. Also, its adjusted net income attributable to common stockholders rose 140.2% year-over-year to $107.40 million, and its adjusted EPS was $0.05, up 150% year-over-year.
The consensus revenue estimate of $2.21 billion for the fiscal year (ending December 2023) reflects a 15.9% year-over-year improvement. Likewise, the consensus EPS estimate of $0.21 for the ongoing year indicates a 253.9% rise year-over-year. Also, PLTR topped the consensus revenue estimates in each of the trailing four quarters.
The stock has gained 132.5% over the past six months and 68.6% over the past year to close the last trading session at $16.32.
PLTR’s POWR Ratings reflect this mixed outlook. The stock has an overall C rating, equating to a Neutral in our proprietary rating system.
PLTR has a B grade for Growth and Quality. The stock has a C grade for Momentum. It is ranked #21 in the same industry.
Click here for the additional POWR Ratings for PLTR (Stability, Sentiment, and Value).
UiPath Inc. (PATH)
PATH provides an end-to-end automation platform that offers a range of robotic process automation (RPA) solutions, mainly in the United States, Romania, and Japan. The company provides a suite of interrelated software to build, manage, run, and govern automation within the organization. It serves banking, healthcare, financial services, and government entities.
On June 27, PATH announced its latest AI-powered automation features that accelerate customers’ ability to discover, automate, and operate automation at scale through Generative AI and Specialized AI. The UiPath Business is adding more AI offerings with Generative AI, including the availability of OpenAI and Azure OpenAI connectors with support for GPT-4.
The company continues to make advancements in Specialized AI, refining its industry-leading solutions like Document Understanding and Communications Mining by incorporating GPT-based technologies. This reflects PATH’s commitment to providing innovative offerings for its customers.
PATH’s trailing-12-month gross profit margin of 78.75% is 61.8% higher than the 48.66% industry average. However, the stock’s trailing-12-month EBITDA margin of negative 4.59% compares to the 8.57% industry average. And its trailing-12-month net income margin of negative 12.87% compares to the industry average of 2.01%.
In terms of forward non-GAAP P/E, PATH is currently trading at 77.38x, 229.6% higher than the industry average of 23.47x. Also, the stock’s forward EV/EBITDA and Price/Cash Flow multiples of 57.61 and 69.21 are considerably higher than the respective industry averages of 14.76 and 20.00.
For the fiscal 2024 first quarter ended April 30, 2023, PATH’s total revenue increased 18.2% year-over-year to $289.59 million, and its gross profit grew 22.9% from the year-ago value to $245.92 million. However, the company reported an operating loss and net loss of $46.41 million and $31.90 million, respectively. Also, its first-quarter net loss per share attributable to common stockholders was $0.06.
Analysts expect PATH’s revenue and EPS for the fiscal year (ending January 2024) to increase 19.7% and 142.9% year-over-year to $1.27 billion and $0.34, respectively. Moreover, the company has topped the consensus EPS estimates in all the trailing four quarters.
Furthermore, the company’s revenue and EPS for the fiscal year 2025 are expected to grow 19.1% and 14.7% from the prior year to $1.51 billion and $0.39, respectively.
Shares of PATH have gained 5.8% over the past month and 18.4% over the past six months to close the last trading session at $17.00. But the stock has plunged 6% over the past year.
PATH’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
PATH has a B grade for Growth. It has a C grade for Quality, Sentiment, and Value. It is ranked #19 out of 25 stocks within the Software - SaaS industry.
In addition to the POWR Ratings I’ve just highlighted, you can see PATH’s ratings for Momentum and Stability here.
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PLTR shares rose $0.19 (+1.16%) in premarket trading Tuesday. Year-to-date, PLTR has gained 154.21%, versus a 19.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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