As inflationary pressures and macroeconomic factors weakened the consumer demand for companies, 2022 turned out to be a challenging year for Software-as-a-service (SaaS) stocks. In response to a lack of demand, tech companies began shedding employees, resulting in mass layoffs. However, the cost-cutting measures and bottom-line focus could lead to better margins and profitability in 2023.
There is no doubt SaaS has become an increasingly viable choice for organizations in terms of accessibility, functionality, and versatility in a competitive business environment. According to SkyQuest, the global SaaS market is expected to reach a value of $720.44 billion by 2028, growing at a CAGR of 25.9%.
Additionally, Gartner, Inc. (IT) reported that the global end-user spending on public cloud services is expected to grow 20.7% to a total of $591.80 billion in 2023, up from $490.3 billion in 2022. Sid Nag, Vice President Analyst at Gartner, stated, “Cloud computing will continue to be a bastion of safety and innovation, supporting growth during uncertain times due to its agile, elastic and scalable nature.”
Given this backdrop, the fundamentally sound SaaS stock The Descartes Systems Group Inc. (DSGX) looks well-positioned to capitalize on the industry’s tailwinds. Conversely, declining financials could leave Palantir Technologies Inc. (PLTR) and Twilio Inc. (TWLO) in jeopardy of a downturn in the near term.
Stock to Buy:
The Descartes Systems Group Inc. (DSGX)
DSGX is a Canadian tech company providing cloud-based logistics and supply chain management business process solutions. Its offerings include B2B service communication, customs, and regulatory compliance, broker and forwarder enterprise systems, global trade intelligence, e-commerce shipping and fulfillment, transportation management and routing, mobile, and telematics.
On January 6, DSGX acquired Supply Vision, a provider of shipment management solutions for North American Logistics Services Providers (LSPs). With this acquisition, the company aims to strengthen shipment management capabilities on the global logistics network.
About the acquisition, Edward J Ryan, Descartes’ CEO, said, “The Supply Vision acquisition complements our recent investments in QuestaWeb, Kontainers and Portrix, as we look to broaden our footprint for LSPs.”
DSGX’s total revenue increased 11.6% year-over-year to $121.50 million for the third quarter, which ended October 31, 2022. Its income from operations grew 25.2% from the year-ago value to $34.80 million, while its net income improved 3.9% year-over-year to $26.50 million.
The company’s EPS increased 3.3% from the year-ago value to $0.31. In addition, its adjusted EBITDA came in at $54.50 million, up 13.1% from the previous-year quarter.
The consensus revenue estimate of $123.49 million for the fiscal fourth quarter (ending January 2022) represents a 9.9% increase from the prior-year period. The consensus EPS estimate of $0.29 million for the current quarter indicates a 31.8% increase year-over-year. In addition, the company surpassed the EPS estimates in three of the trailing four quarters.
Shares of DSGX have gained 7.2% over the past six months to close the last trading session at $70.75.
DSGX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
DSGX has a B grade for Stability, Sentiment, and Quality. Within the Software – SAAS industry, it is ranked first among 26 stocks.
In addition to the grades I’ve just highlighted, view DSGX ratings for Growth, Value, and Momentum here.
Stocks to Avoid:
Palantir Technologies Inc. (PLTR)
PLTR builds software platforms that help organizations integrate their data, decisions, and operations at scale. The company operates through two segments: Commercial and Government. It has built three principal software platforms: Palantir Gotham, Palantir Foundry, and Palantir Apollo.
In terms of forward non-GAAP P/E, PLTR is trading at 144.35x, 656.3% higher than the industry average of 19.09x. Its forward Price/Sales multiple of 7.11 is 171% higher than the industry average of 2.62x. Its forward Price/Cash Flow ratio of 60.88 compared with the industry average of 18.06.
PLTR’s adjusted income from operations declined 30% year-over-year to $81.25 million for the third quarter ended September 30, 2022. The company’s adjusted net income and adjusted EBITDA decreased 80.4% and 26.8% year-over-year to $16.08 million and $87.19 million, respectively. Also, its adjusted EPS amounted to $0.01, representing a 75% decline from the prior year period.
Analysts expect PLTR’s EPS for the fiscal year 2022 (ended December 31, 2022) to decline 65.4% year-over-year to $0.05. It failed to surpass Street EPS estimates in each of the trailing four quarters, which is disappointing.
Over the past year, the stock has declined 60.8% to close the last trading session at $6.50.
PLTR’s weak prospects are reflected in its POWR Ratings. It has an overall D rating, equating to Sell in our proprietary rating system.
It has an F grade for Sentiment and a D for Value and Stability. It is ranked #19 in the D-rated Software – SAAS industry. Click here to see the other ratings of PLTR (Growth, Momentum, and Quality).
Twilio Inc. (TWLO)
TWLO offers a cloud communication platform that enables developers to build, scale, and operate real-time communications within software applications. It also offers a customer engagement platform with software designed to address issues like account security, contact centers, and a set of APIs.
On December 9, 2022, the company announced the voluntary delisting of its Class A common stock from the Long-Term Stock Exchange (LTSE) after evaluating discretionary expenses and determining that the costs associated with maintaining a dual listing are no longer justified.
TWLO’s total operating expenses increased 53.9% year-over-year to $919.07 million for the third quarter ended September 30, 2022. Its non-GAAP net loss and net loss per share attributable to common shareholders came in at $49 million and $0.27, compared to non-GAAP net income and income per share of $1.75 million and $0.01 in the year-ago quarter, respectively.
Analysts expect TWLO’s EPS to be negative $0.46 for the fiscal year 2022. The stock has declined 78.1% over the past year and 65.5% over the past nine months to close the last trading session at $50.48.
TWLO’s bleak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system.
It has a D grade for Momentum, Stability, and Quality. It is ranked #24 in the same industry. Click here to see the other ratings of TWLO for Growth, Value, and Sentiment.
DSGX shares were trading at $70.41 per share on Tuesday morning, down $0.34 (-0.48%). Year-to-date, DSGX has gained 1.09%, versus a 1.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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