One of my favorite follows on Twitter for growth stocks is Chris Perruna. I’ve known of Chris for over a decade now and have followed his blog forever. His stocks to watch lists have always been fascinating to me so I wanted to emulate that with this post and see how the next 12 months go.
He focuses more generally on growth stocks, which includes a number of SaaS names, so my goal here is to focus solely on SaaS. You’ll find that a lot of the names that I list are relatively new IPOs, but that is because they have a smaller market capitalization, are the fastest growing and revenue is the greatest driver of value for stocks over the long term. If you want to make outsized returns, ultimately you have to find stocks with a large Total Addressable Market (TAM) and room to grow.
I’m hoping that a couple of these names become 10 baggers over the next few years in a similar vein to what Shopify and Twilio have done for me in the past 4 years. Disclosure: I own all of these as part of my SaaS portfolio so my conviction is matched by my money invested.
Without further adieu here are my SaaS stocks to watch for 2021.
Snowflake solves a common problem for tech companies that have grown fast, built microservices to scale, and now have a strong need to build a data lake to help perform business analysis and implement machine learning models. My last company was a great use case. We had grown significantly and we’re having trouble getting other tools like AWS’ redshift or Google cloud storage to be helpful. We chose snowflake because they were able to connect to our existing data sources relatively quickly and easily and had actually helpful support. The support is a key component for those new to implementing a data lake.
This makes their business sticky and essential. I’d expect organic growth from existing customers to be strong and successful giving their sales teams a huge pool of case studies to show their prospects.
I covered C3 as part of my SaaS portfolio. The highlights are that C3 is that they provide AI tools for companies that have already built some sort of infrastructure. Check out my review in the link.
Lemonade is a polarizing stock. It is in a boring industry, insurance, that is very hard to differentiate on and has entrenched highly valued brands. I believe though that it is very well positioned among the younger demographic for a couple different reasons. First it has great tech compared to legacy insurance companies. They have a focus on consumer branding. Second they are capturing these young people early with their rental insurance product. Insurance, much like banking, is a very high switching cost product so by capturing these customers early they will have a very high and long lifetime value.
Here’s a Twitter thread on Why I Like Lemonade.
I recently bought a starter position in Affirm. Affirm is a fintech that is attempting to disrupt the unsecured installment loan market or “Buy now, pay later”. Its promise is to deliver on lower, flexible payments with no undisclosed fees. The leadership is what stands out most to me. Max Levchin is part of the “Paypal Mafia” that has gone on to conquer the startup ecosystem. This network is strong and full of successful executers. There is some concern that their 30% concentration of business in Peloton brings about a significant amount of risk. However, leadership recognizes this and will look to spread their business elsewhere. Expect a blog post shortly.
I covered Upstart as part of my Saas portfolio as well. Again it is a boring industry, banking. I also know this industry well and banks are always looking for better ways to originate more loans and underwrite them better. Upstart promises both and offers a nice white-labeled way to do it. Check out my review in the link.
After a bumpy start to their life as a publicly traded entity, Elastic seems to have found its footing. Similar to MongoDB’s document database, Elastic provides an open source search offering that powers traditional in-app search, logging, and security. They recently changed their license to disrupt Amazon’s ability to use their technology without attribution. The main competition to Elastic is Algolia, which I’d expect to go public in the next few years as well. At the moment Algolia seems to be positioned more in the introductory search area where a startup may use it to get up and running quickly. Elastic is a bit more full featured and faster for larger data sets.
I’ve known of Unity for several years. They’ve been democratizing game development by introducing tooling that doesn’t suck. Most game development is done in C/C++, which if you’re a software developer, are somewhat difficult to work with at time. Unity’s tooling is done with C#, a very nice to use modern programming language that will be familiar to anyone that has done object oriented programming.
I’m expecting a few other companies to IPO as well, so I’m listing them here to keep tabs.
GitLab is what I would like to call a Software Development Lifecycle as a Service provider. They have developed vertically integrated software to help teams develop, test, and ship software as seamlessly as possible. Their main competitors are Atlassian (I have a position) and GitHub (Microsoft owned).
If you’re an investor, you’ve most likely heard of Robinhood. They’ve revolutionized the industry with no-commission trades. While they’ve had their hiccups especially during the corona crash, I still think their UI makes them the best place for new investors to start out.
If you have kids, then you know Roblox. Roblox is a massive multiplayer online game (MMOG) where worlds are mostly user generated. Kids buy or accumulate “Robux”, a virtual currency, to buy add-ons or rewards. It recently overtook Minecraft in terms of Monthly Active Users.
This was mentioned earlier, but Algolia is a competitor to Elastic. Their get to market strategy was to focus on small shops, but as they grow they will be forced to go upmarket and compete directly with Elastic. Much like Elastic, they have developer advocates who are pushing tech leaders to make purchasing decisions instead of the other way around.
That’s it for me. We’ll check back in 2022. What growth names are you following this year?
I’ve written an Intro to SaaS book here that explains how I earned over 100% return in the past year and 226% in the past 3 years. Check it out if you’d like to learn more about one of my favorite asset classes outside of dividend growth stocks.