Regular readers of Nanalyze know that we have a soft spot in our hearts for software-as-a–service (SaaS) stocks. There’s a number of reasons behind our love affair. Firstly, SaaS businesses provide a steady stream of predictable, recurring revenue through subscriptions. Secondly, these companies generally enjoy high-gross margins, enabling them to generate significant revenue to grow rapidly, grab market share, and absorb downturns. Thirdly, customer stickiness. Once hooked on a SaaS platform, customers are loath to abandon ship, leading to high customer retention rates and opportunities for upselling.
One SaaS stock we’ve been hooked on for a while is Snowflake (SNOW), a cloud-based data warehousing and analytics platform that meets and exceeds all key SaaS metrics. After all, if Snowflake is good enough for Warren Buffett, then it’s good enough for Nanalyze. One drawback of SaaS stocks is that they often command a premium due to their growth potential. However, that also means that any results deemed less than perfect can rock the stock, so it’s important to figure out a fair valuation for stocks like Snowflake and stick to your convictions. We have done just that, adding Snowflake stock to both the Nanalyze Disruptive Tech Portfolio and the Nanalyze New Money Portfolio when the simple valuation ratio (market cap/annualized revenue) drops below our threshold.
