In this piece, we will look at Jim Cramer’s bold predictions about these SaaS stocks.
As 2024 comes to a close, the software-as-a-service or SaaS industry has been shaken up quite a bit. Artificial intelligence has defined the stock market in 2024 and ensured that investors can end in the green despite several sectors such as healthcare, real estate, and industrial performing poorly.
The age of AI has also affected the SaaS industry. These firms rely on margin-friendly revenue and stable recurring revenue through offering software products to businesses. However, AI offers firms the ability to self-develop software, which means that for SaaS firms, their products might not be as in demand.
To understand the impact of AI on SaaS stocks, consider two key valuation multiples for this sector. These are the enterprise value to revenue and the Rule of 40. A firm’s enterprise value measures its market value and net debt, while the Rule of 40 checks whether a SaaS company is growing its revenue and free cash flows sufficiently. Higher readings for both are preferable, with the Rule of 40 in particular demanding a score greater than 40.
Research from Volition Capital shows that SaaS multiples have undergone seismic shifts throughout the coronavirus pandemic, the subsequent high interest rate regime, and the current interest rate era. Ahead of the pandemic, the crème de la crème of SaaS firms, i.e. those with a Rule of 40 score greater than 40 and a greater than 30% revenue growth rate had a median revenue multiple of 22.9x. The multiple peaked at 42.3x in September 2020 as the booming demand for digital services meant that investors valued the firms more richly compared to their revenue.
Then, as the Federal Reserve started to hike interest rates, the tables turned. Interest rates are key for SaaS stock performance as low rates mean that enterprises have plenty of cash to dole out for their spending. Additionally, higher rates also mean that since investors have more lucrative investment alternatives available, they place a higher premium for future growth. The high interest rates meant that in December 2022, the SaaS revenue multiple for the top firms was 9.2x, or less than four times its 2020 peak. The tail-end of 2022 also marked the start of Wall Street’s current AI euphoria. Back then, only the GPU designer whose chips are powering AI or the software company known for Windows had benefited from investor attention.
However, in less than a year, as the impact of AI on SaaS firms became clearer, the multiple was nearly cut in half. It dropped to 5.1x in October 2023. As if this weren’t enough, December 2024 does not have a reading for the top SaaS firms’ revenue multiple. This is because in Volition’s data set, there are no such companies anymore. Inflation has impacted the industry, and now, investors are focused on SaaS firms that can deliver growth. Consequently, the revenue multiple for firms with a Rule of 40 score lower than 40 but a revenue growth rate higher than 30% was 10.6x as of the latest market close. It sat at 29.1x in September 2020 and was 14.1x at the start of the year.
Hedge fund Coatue Management speculated about the reasons behind the dropping SaaS valuations in a recent presentation. It outlined that SaaS firms have to now contend with a consumption-driven model as opposed to an earlier seat model. The consumption model only charges customers when they use resources. On the other hand, a seat model means that the firm earns money regardless of its products being used or not.
So what’s Jim Cramer saying about SaaS stocks as the industry undergoes a historic shift? Let’s find out.
Our Methodology
To compile our list of Jim Cramer’s bold predictions about SaaS stocks, we scanned the stocks he mentioned in Mad Money and Squawk on the Street as far back as in August. Then, we picked out SaaS stocks and ranked them by the number of hedge funds that had bought the shares in Q3 2024.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
10. Paychex Inc. (NASDAQ:PAYX)
Number of Hedge Fund Holders In Q3 2024: 20
Date of Cramer’s Comments: 8-27-24
Performance Since Then: 7.90%
Paychex Inc. (NASDAQ:PAYX) is an operations management software company that enables businesses to manage payroll, human resources, and other functions. This means that the stock is influenced by investors’ perceptions of the economy. Two notable events in 2024 solidify this fact. The first is when Paychex Inc. (NASDAQ:PAYX)’s shares soared by 6% after President-elect Trump won the November election. The shares were influenced by investors’ belief that the economy would benefit from the perceived business-friendly approach of the new administration. The second is when Paychex Inc. (NASDAQ:PAYX)’s stock dropped by 3% in December after the Fed’s announcement of two rate cuts in 2025 as opposed to an earlier four. Here’s what Cramer said:
“Paychex is funny. Every time it goes down, I tell you to buy it, and every time analysts don’t like it, they hit it. But what happens? It comes up smelling like a rose. I think Paychex, with a 3% yield, is a buy. I would buy some here and then wait for an analyst to knock it down and buy even more. The company is excellent. I’m a client.”
9. SAP SE (NYSE:SAP)
Number of Hedge Fund Holders In Q3 2024: 36
Date of Cramer’s Comments: 8-29-24
Performance Since Then: 13.8%
SAP SE (NYSE:SAP) is the largest provider of enterprise resource management software in the world. Estimates suggest that it holds a 24% market share of the global ERP market. Therefore, SAP SE (NYSE:SAP)’s shares depend on business spending which is influenced by economic health and interest rates. Its shares gained more than 4% in October after a robust third-quarter earnings report saw SAP SE (NYSE:SAP)’s cloud revenue grow by 27% annually. The firm attributed the growth to AI, which gave investors plenty of opportunity to be optimistic about the market demand for AI products and services. Here’s what Cramer said in August:
“SAP is a giant company that helps coordinate technology at the enterprise level. We know they’ve got a really good product. We’ve had them on before.”
8. Palantir Technologies Inc. (NASDAQ:PLTR)
Number of Hedge Fund Holders In Q3 2024: 43
Date of Cramer’s Comments: 9-18-24
Performance Since Then: 113.6%
Palantir Technologies Inc. (NASDAQ:PLTR) is one of the hottest SaaS stocks in the market right now. Its shares are up by 367% year-to-date on the back of a couple of factors. Firstly, Palantir Technologies Inc. (NASDAQ:PLTR) has significantly grown its US commercial revenue in 2024. The sales grew by 70% in Q2 as the firm’s operating model of working closely with customers for AI integration yielded results. Secondly, Palantir Technologies Inc. (NASDAQ:PLTR) is a new-age government contractor that stands to not only introduce AI into the US government’s operations but also benefit from a push towards optimizing defense spending. The stock boomed by 34% after the November election as the firm also raised its revenue forecast. Here’s what Cramer said about Palantir Technologies Inc. (NASDAQ:PLTR) in September:
“Well, Palantir is a speculative stock. It’s a meme stock; it has momentum because individual investors keep piling into it. It’s not really even a stock in the traditional sense; it’s just a barometer of enthusiasm for some business that may or may not be doing well. I wish there were more to it.”
7. MongoDB, Inc. (NASDAQ:MDB)
Number of Hedge Fund Holders In Q3 2024: 49
Date of Cramer’s Comments: 9-12-24
Performance Since Then: 20.6%
MongoDB Inc. (NASDAQ:MDB) is a specialty SaaS firm that is also known as a Database-as-a-software (DaaS) firm. The year’s second half has been topsy turvy for the firm’s stock. MongoDB Inc. (NASDAQ:MDB)’s shares soared by 23% at August end when the firm’s $478 million in revenue and 78 cents in EPS beat analyst estimates of $464 million and 49 cents. It also guided fiscal Q3 revenue at a midpoint of $493 million and EPS at 66.5 cents to also beat estimates. However, the shares fell by a whopping 16.9% in December when despite a guidance raise the firm’s announcement that its CFO and COO would leave roiled investors. Here’s what Cramer said in September:
“You know, MongoDB, Inc.(NASDAQ:MDB) is an enterprise software company that put up terrific numbers and isn’t getting credit in the same way Salesforce.com, inc. (NYSE:CRM) and others are. People tend to dislike enterprise software, except for ServiceNow. I think MongoDB, Inc. (NASDAQ:MDB) is at the right price.”
6. Palo Alto Networks, Inc. (NASDAQ:PANW)
Number of Hedge Fund Holders In Q3 2024: 64
Date of Cramer’s Comments: 8-19-24
Performance Since Then: 7.48%
Palo Alto Networks, Inc. (NASDAQ:PANW) is a cybersecurity firm that has seen its fair share of ups and downs on the stock market in 2024. The stock cratered by 28% in February after a guidance cut, but since then, it has gained 40.9%. For the next two earnings reports, Palo Alto Networks, Inc. (NASDAQ:PANW) raised its revenue guidance and topped analyst estimates. Yet, it was the fiscal fourth quarter report in August that led to share price action. In the report, Palo Alto Networks, Inc. (NASDAQ:PANW)’s midpoint annual profit per share estimate of $6.25 beat estimates of $6.19 while $2.19 billion in revenue beat estimates of $2.16 billion. This led to a 7% jump in share price. Palo Alto Networks, Inc. (NASDAQ:PANW)’s shares also rose by 5.1% after Trump’s election win but dropped by 6.2% after the Fed’s rate cut announcements in December. Here’s what Cramer said in August:
“Palo Industries is a fantastic, under-the-radar industrial stock, and given its recent pullback, I think now is the time to buy. When Palo Alto Networks reported back in February, the guidance was considered dismal, and the stock plunged from the $360s to the $260s in a single day. But after speaking to the CEO, what did I do? I told you to stick with it, maybe even do some buying, and we did just that for the Travel Trust because the future is bright for this best-of-breed cybersecurity play. Sure enough, since then, the stock has been a juggernaut, closing at $343 today and rallying in after-hours trading. Palo Alto reported a strong top and bottom line beat with very encouraging guidance for the 2025 fiscal year, which has already started.”
5. Datadog, Inc. (NASDAQ:DDOG)
Number of Hedge Fund Holders In Q3 2024: 71
Date of Cramer’s Comments: 8-19-24
Performance Since Then: 23%
Datadog, Inc. (NASDAQ:DDOG) is a SaaS firm that enables businesses to observe and analyze their cloud environment. The business model enables it to benefit from increased AI spending in the industry as firms often rely on observability providers to monitor their AI environments. Coincidentally though, Datadog, Inc. (NASDAQ:DDOG)’s largest share price jump in H2 wasn’t of its own doing. The firm’s stock soared by 15.6% in November after cloud computing firm Snowflake beat its third-quarter estimates and grew revenue by 28% annually. Here’s what Cramer said about Datadog, Inc. (NASDAQ:DDOG) in August:
“Datadog is usually a fabulous company. There were people trying to buy it for $20 billion before it ever went public. My problem is that it’s just the definition of enterprise software—the kind of analytics that tells you how your company’s doing. There are too many players in that space, Dave. So I’m going to reiterate: I don’t trust it yet, but it is a very good company. And thank you for the question.”
4. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Holders In Q3 2024: 71
Date of Cramer’s Comments: 8-16-24
Performance Since Then: 21%
Snowflake Inc. (NYSE:SNOW) is a data warehousing firm that commands a 22% market share. It is down 18% year-to-date, but the drop would have been much sharper had the shares not soared by a whopping 33% in November. The massive share price jump came after Snowflake Inc. (NYSE:SNOW)’s third-quarter earnings report saw it beat analyst earnings and revenue estimates of 15 cents and $897 million by posting 20 cents and $942 million, respectively. The firm also increased its AI exposure by teaming up with Amazon-backed AI firm Anthropic to build AI agents for data analysis. Here’s what Cramer said about the stock in August:
“The latest feedback I’m getting about Snowflake is that they’re facing some difficulties and are being challenged by a couple of companies. It’s kind of a tough road for them right now. I think I’m going to hold off on recommending it.”
3. CrowdStrike Holdings, Inc. (NASDAQ:CRWD)
Number of Hedge Fund Holders In Q3 2024: 74
Date of Cramer’s Comments: 8-29-30
Performance Since Then: 32.2%
CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a cybersecurity firm that was at the center of a major logic error earlier this year when its faulty Falcon software update crashed millions of computers worldwide. Since the July crash, the software stock has yet to recover all of its lost value. CrowdStrike Holdings, Inc. (NASDAQ:CRWD)’s climb to previous highs has been a slow affair as investors gradually regain confidence in its ability to navigate through the fallout. The shares gained 11% in November after President-elect Trump’s victory in the November election. Here’s what Cramer said in August:
“It’s been a crazy couple of months for Cramer favorite CrowdStrike, the cybersecurity company that made headlines for all the wrong reasons back on July 19th when a botched update caused widespread tech issues, shutting down millions of systems globally. There was a lot of speculation that these problems could hurt their business, but last night, CrowdStrike reported strong sales, excellent earnings, and terrific customer retention.
“As a result, the stock jumped nearly 3% today and was up even more at one point. While it’s still down over 30% from last month’s all-time high, it has rebounded 35% off its recent lows, where I said it had bottomed out. Could this have more room to run?”
2. ServiceNow, Inc. (NYSE:NOW)
Number of Hedge Fund Holders In Q3 2024: 78
Date of Cramer’s Comments: 8-16-24
Performance Since Then: 29%
ServiceNow, Inc. (NYSE:NOW) is a SaaS firm that provides human resource management products and services. Its shares have been performing well in the second half of the year as the shares soared by 5.39% in October after its low-end $2.875 billion Q4 subscription revenue guidance beat analyst estimates of $2.85 billion. ServiceNow, Inc. (NYSE:NOW)’s stock rose by an additional 6.22% in December after peer firm Salesforce beat its fiscal year 2024 earnings guidance and announced significant momentum for its AI platform. Here’s what Cramer had said in August:
“First, we had two tech companies—just two—that delivered fantastic sales, earnings, and forecasts. That’s the magic trit kit that makes people feel comfortable buying even into tsunami of selling and those. These two companies includes ServiceNow. Both companies exceeded expectations and provided impressive forecasts. Interestingly, both are leveraging AI powered by the latest and greatest Nvidia chips.”
1. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders In Q3 2024: 116
Date of Cramer’s Comments: 8-29-24
Performance Since Then: 30.63%
Salesforce, Inc. (NYSE:CRM) is a customer relationship management SaaS software provider. It is one of the biggest players in the industry, with estimates suggesting that Salesforce, Inc. (NYSE:CRM) commands a 21.7% market share. The stock rose by 3% in November after the presidential election win. Then the shares soared by 11% in December after the firm’s fiscal Q3 earnings report shared fiscal 2025 revenue guidance of $37.9 to beat analyst estimates of $37.86 billion. Salesforce, Inc. (NYSE:CRM) also announced that it had signed 200 deals for its Agentforce AI platform within a week of launch. Here’s what Cramer said in August:
“Last night, we heard from Salesforce CEO Marc Benioff, who discussed how his Agentforce AI platform is starting to gain traction. Agentforce helps companies create fully autonomous AI sales and service agents. Benioff shared some exciting developments, mentioning companies that have already deployed Agentforce and seen meaningful results.
“Salesforce’s new AI initiative will lead to a massive expansion of gross margins, as bots are much cheaper than people. We’ll learn more at the company’s annual Dreamforce Festival in three weeks. Again, it’s not a barn burner, but that’s the point of artificial intelligence: it doesn’t burn barns; it simply imitates us, which can be very valuable for businesses. That stock should have been up, not down today, because the use cases were so compelling. I don’t know what happened; it was a mistake, to me.”
CRM is a SaaS stock Cramer talked about in August. While we acknowledge the potential of CRM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CRM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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