5 Essential Traits To Look For Before You Buy A SaaS Stock

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Since Marc Andreessen published his essay Why Software Is Eating The World in 2011, software companies have been some of the very best-performing public equities. Companies like Salesforce (CRM), Atlassian (TEAM) or ServiceNow (NOW) are fantastic success stories of the past decade.

In recent years, Software-as-a-Service (or SaaS for the rest of this article) has really taken the spotlight. And for good reasons. IT purchasing has become decentralized, sales cycles are now shorter and product adoption is more nimble than ever.

Most SaaS companies offer the best aspects of a digital business:

  • Virality with freemium models targeting developers and teams.
  • Scalability with large TAM (total addressable market).
  • Optionality with rapid innovation in machine learning and AI.
  • Profitability with gross margins often north of 70%.
  • Predictability with an increasing level of recurring revenue.
  • Accelerated tailwinds created by the COVID-19 global pandemic.

Recently, research firm ARK Invest provided an update on their software market forecast, showing an expected 21% compound annual growth rate for SaaS businesses in the coming decade. They explain:

Despite incumbents and startups embracing Software-as-a-Service, the SaaS market still makes up just 25% of the enterprise software market. According to industry forecasts, annual SaaS revenue growth will decelerate from 16.1% in 2019 to 13.6% by 2022, reflecting, in our view, “reversion to the mean” thinking. Instead, as…

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