The cloud Software-as-a-Service (SaaS) industry has gotten off to a rough start in 2022, with the sector’s two main ETFs significantly underperforming the comparable returns of both the S&P 500 and the NASDAQ over the same timeframe.
The downward slide commenced after the Federal Reserve announced it planned to tighten monetary policy last month, triggering an equity exodus that has boosted volatility and, spurred on by Ukraine/Russia tensions, continues to roil markets, particularly frothy high-growth technology stocks with lofty valuations.
The First Trust Cloud Computing ETF (NASDAQ:SKYY), and the Global X Cloud Computing ETF (NASDAQ:CLOU) are down 10.8% and 13.6% respectively this year, compared to the S&P 500’s year-to-date decline of 6.1% and the NASDAQ's 9.6% drop.
Despite recent turmoil, below we highlight three SaaS leaders well worth considering as the group attempts to bounce back from its recent selloff. All three still have plenty of room to grow their respective businesses, making them solid long-term investments.
1. Fortinet
- Year-To-Date Performance: -10.3%
- Percentage From ATH: -13.2%
- Market Cap: $52.7 Billion
Fortinet (NASDAQ:FTNT), which develops and sells cybersecurity solutions, such as antivirus software, intrusion prevention systems and endpoint security components, has seen its stock endure some turbulence lately.
Year-to-date, shares of the network-security firm have lost 10.3%, underperforming the broader market, as investors flee high-growth tech names with rich valuations that are most sensitive to rising rates.
FTNT ended Tuesday’s session at $322.42, about 13% away from its all-time high of $371.77 touched on Dec. 29. At current levels, the Sunnyvale, California-based cybersecurity specialist has a market cap of $52.7 billion.
We expect shares of the thriving information-security company to take off again in the weeks and months ahead given the strong demand for its networking and cybersecurity tools amid the current environment.
Fortinet reported fourth quarter financial results which blew past Wall Street estimates on Feb. 3, extending its impressive streak of profit beats to 16 consecutive quarters. Revenue climbed around 29% year-over-year to $963.6 million—marking the highest quarterly sales total in the company’s history—as the shift to the work-from-home model created soaring demand for its cloud-based security solutions from large enterprises.
Calculated billings—which refers to revenue plus deferred revenue acquired over the quarter—totaled more than $1 billion for the second quarter in a row. The key sales growth metric increased 36% from the same period last year to $1.31 billion.
Fortinet’s financial projections for the year ahead also came in above forecasts as it continues to benefit from robust demand for its security products and services due to sped-up enterprise digitalization trends.
In its latest earnings report, CEO Ken Xie projected:
"Given our robust pipeline and strong business momentum, we expect several more years of solid growth as Fortinet is well positioned to address our $174 billion market opportunity."
Indeed, 18 out of the 31 analysts surveyed by Investing.com are optimistic on FTNT stock, forecasting a gain of 13.4% over the next 12 months to $365.69/share. Only two analysts surveyed have a ‘sell’ rating on the name.
Source: Investing.com
2. Datadog
- Year-To-Date Performance: -5.1%
- Percentage From ATH: -15.3%
- Market Cap: $52.7 Billion
With investor enthusiasm for software companies with extremely high valuations waning, Datadog (NASDAQ:DDOG) shares have struggled in recent weeks amid the selloff in many top-rated technology stocks.
After scoring a sizable gain of 80% last year, Datadog, which provides a security monitoring and analytics platform for software developers and information technology departments, has seen its stock decline about 5% so far in 2022.
DDOG is roughly 15% below its record peak of $199.68 touched on Nov. 17, closing at $168.99 yesterday. At current valuations, the New York City-based Software-as-a-Service company has a market cap of $52.7 billion.
Our view is that Datadog shares seem poised to resume their march higher in the near term, as the current work-from-home and hybrid-work environment forces businesses to accelerate cloud migration and further adopt digital transformation.
In a sign of how well the security software maker's business has performed in recent months, Datadog reported fourth-quarter financial results that crushed Wall Street’s profit and revenue estimates on Feb. 10. It also provided an upbeat outlook for the months ahead.
Earnings per share jumped 233% from the year-ago period to $0.20, while sales surged 84% year-over-year to a record $326.2 million, reflecting soaring demand for its cloud-based cybersecurity software tools from large enterprises.
The SaaS company said it had 216 customers with annual recurring revenue (ARR) of $1 million or more as of the end of Q4, up a whopping 113% from 101 customers reported in the same quarter last year.
CEO Olivier Pomel stated in the earnings release:
"We continue to believe we’re in early days with our opportunities in observability. And we are just starting our efforts in cloud security and developer-focused products."
Not surprisingly, 16 out of 22 analysts surveyed by Investing.com rate DDOG stock as "outperform," implying almost 25% upside over the next 12 months from current levels to $211.06/share.
Source: Investing.com
3. Zscaler
- Year-To-Date Performance: -11%
- Percentage From ATH: -24%
- Market Cap: $40 Billion
So far, 2022 has been a bit challenging for Zscaler (NASDAQ:ZS), a provider of automated threat forensics and dynamic malware protection against advanced cyber threats. The recent broad-based tech selloff has taken some wind out of the high-flyer’s sails.
Shares of the San Jose, California-based company—which enjoyed an annual gain of 61% in 2021—have lost 11% so far this year amid an aggressive reset in valuations across the frothy tech space, with high-growth software stocks amongst some of the hardest hit.
ZS ended at $285.82 last night, approximately 24% below its record peak of $376.11 reached in November 2021. At current levels, the cybersecurity specialist has a market cap of $40 billion.
Despite the recent pullback, we believe Zscaler still looks like a good bet going forward, considering the ongoing surge in demand for its security tools and products, which has seen it become one of the leading go-to names in the cloud-based cybersecurity space.
The San Jose, California-based tech company is anticipated to deliver solid earnings and revenue growth when it releases financial results for its fiscal second quarter after the U.S. market close on Thursday, Feb. 24.
Consensus expectations call for the information-security specialist—which has topped analyst expectations for 15 straight quarters, dating back to Q2 2018—to post earnings per share of $0.11, improving from EPS of $0.10 in the year-ago period.
Meanwhile, revenue is forecast to climb 53.5% year-over-year to $241 million, benefitting from robust demand for its Zero Trust Exchange platform, which lets organizations provide secure access to internal applications and services from remote locations.
In addition, investors will pay close attention to Zscaler’s outlook for the months ahead as it looks to be one of the main beneficiaries of the ongoing increase in cybersecurity spending from large enterprises due to the rampant surge in cyber and ransomware attacks.
According to Investing.com, the average ZS stock analyst price target is around $382, representing an upside of almost 34% from current levels over the next 12 months.
Source: Investing.com