Software-as-a-service (SaaS) companies have become popular investments thanks to their high growth potential and ability to deliver excellent net margins.
In today’s market, investor demand for these stocks is being enhanced by enthusiasm for AI technology, as large SaaS companies are in some of the best positions to deploy artificial intelligence tools at scale.
Three of the top stocks in this space are Snowflake (NYSE:SNOW), Palantir (NYSE:PLTR) and Crowdstrike (NASDAQ:CRWD). Though these companies aren’t direct competitors, they are all among the fastest-growing large tech businesses in the US today.
Snowflake
Snowflake has been one of the highest growth companies in the US market over the last several years. Throughout 2021 and into early 2022, the company maintained triple-digit revenue growth rates.
Though these rates have fallen off to 32.9% as of the most recent quarterly reporting, Snowflake’s ability to rapidly scale up sales has been extremely impressive. In Q1, the company’s revenues climbed to about $829 million.
Snowflake’s problem, however, is that it loses money at a rapid rate. In the last full fiscal year, the company lost over $836 million.
This losing streak continued to deepen in Q1 of this year with Snowflake reporting a loss of about $317 million. Even with its exceptional revenue growth and a cash reserve that has allowed it to avoid debt, these losses have weighed on Snowflake’s share prices.
Snowflake is also encountering headwinds due to a recent security breach that affected many of its customers. Hackers accessed Snowflake accounts via stolen login details, compromising enormous amounts of sensitive customer data.
Customers such as Ticketmaster, LendingTree and even AT&T have all been targeted. The net effect has been a further deterioration of Snowflake’s share prices, which have fallen 11.8% in the past three months.
With that said, Snowflake’s troubles have also brought its valuation down into a slightly more reasonable range. SNOW shares trade at 15.5x sales, a number that is extremely high but well below both Palantir and Crowdstrike.
Importantly, Snowflake’s P/S ratio has historically averaged well above 20, meaning that the stock is currently about as cheap as it has ever been by this metric.
Palantir
Palantir would appear to have a natural advantage when compared to Snowflake and Crowdstrike, as it’s the most reliably profitable of the three SaaS companies.
In Q1, Palantir reported $106 million in GAAP net income on revenues of $634 million. This translates to a 17% net margin. Crucially, Q1 represented the sixth consecutive quarter in which Palantir has reported positive net income.
Palantir’s year-over-year revenue growth rate is also accelerating, having reached its low point of 12.7% in Q2 of last year.
Since then, each successive quarter has seen a higher revenue growth rate, culminating in year-over-year revenue growth of 20.8% in Q1 of this year. In part, this was due to Palantir’s long-awaited push into the private sector.
US commercial revenue grew 40% year-over-year in Q1, significantly outpacing the average rate of revenue growth across the company’s business.
A final benefit of Palantir is its solid balance sheet. With no long-term debt and a current ratio of 5.9, the company has ample room to invest in new growth initiatives. This is especially important given its focus on becoming a go-to AI platform.
Right now, the company is allowing potential customers to trial its existing AI products for free. This customer acquisition strategy, combined with continued R&D, has the potential to make Palantir an AI powerhouse for businesses and government entities in the years to come.
The downside for Palantir is the fact that the company’s excellent performance has given it a premium pricing even by high-growth SaaS standards. The stock trades at 86.9x forward earnings, 27.3x sales and nearly 300x cash flow.
Even taking into account the fact that Palantir’s earnings are projected to grow by over 22% annually over the coming five years, these ratios make PLTR look quite expensive.
Crowdstrike
In terms of profitability, Crowdstrike occupies a middle ground between Snowflake’s ongoing losses and Palantir’s increasingly attractive profits. The company began posting positive earnings late in 2023 and made a profit of $43 million in Q1.
The net margin for the quarter was just 4%, but continued improvements and scaling could help Crowdstrike realize much more income in future quarters.
Revenue growth has also been consistently above 30% on a year-over-year basis, though it has plateaued at that level over the past few quarters. In Q1, the company brought in $921 million in total revenues. At $3.28 billion, Crowdstrike also has the highest trailing 12-month revenues among these three companies.
Crowdstrike’s real advantage, however, may come from the efficiency of its marketing spending. The company spends less as a percentage of its revenues than either Snowflake or Palantir, but its revenue growth rates are comparable to those of Snowflake and well above Palantir’s. As such, Crowdstrike’s revenue growth appears to be keeping decent pace with its ongoing spending.
One slight issue for Crowdstrike when compared to Palantir and Snowflake is the fact that the company does carry a 0.3 debt-to-equity ratio.
Given that the company has become profitable and this ratio is fairly low, however, it’s unlikely that debt will become a significant constraint to Crowdstrike’s growth unless it borrows much more.
Crowdstrike’s valuation is also slightly more appealing than Palantir’s. CRWD trades at 22.6x sales, 76.4x forward earnings and 146.7x cash flow. Though still very expensive, these multiples may be justified by the expected 40% compounded annual growth rate of earnings per share over the coming five years.
Which Is the Best Buy?
Even with the selloff having made it more attractive from a value perspective, Snowflake’s massive losses and the ongoing fallout from its recent data breach could make it a risky stock to hold at the moment.
Palantir’s performance has been exceptional, but its high pricing may leave it vulnerable to sudden corrections for even modest underperformance.
Crowdstrike, however, balances high revenue growth, massive forward earnings growth potential and current profitability. As such, Crowdstrike may be the best buy among these three stocks at the moment, even after the most recent cybersecurity breach. Short-term the momentum remains to the downside but long-term it has the potential to more than recover.
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