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However, an exceedingly high P/S ratio is something to view cautiously regardless of the quality of the company or its growth prospects.
A higher P/S ratio denotes optimism among investors that attractive revenue growth will continue and that the revenue will eventually generate profits. The price-to-sales (P/S) ratio, which equals a company's market capitalization divided by its annual revenue, is often used as a valuation metric for SaaS companies in place of the P/E ratio. If it’s not, then the company may be growing but still spending too much to bring in new customers. How much is a SaaS company spending to acquire each new customer? You can calculate the ratio of sales and marketing spending to revenue and evaluate whether that ratio is declining over time. Instead, you can consider these two important metrics: Customer acquisition cost Many investors use the price-to-earnings (P/E) ratio to evaluate a company, but with many SaaS companies not yet profitable, this type of analysis is not always possible. Adobe is as dominant as it’s ever been, and that’s unlikely to change. Revenue surged 22% and earnings per share jumped 28% in the third quarter, and the company expects similar growth to end the year. But the company performed well during the pandemic by posting record revenue and profit, and that solid growth has continued into 2021. Like Microsoft’s, Adobe’s stock is historically expensive.
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Transitioning from selling one-off licenses for hundreds of dollars to selling subscriptions costing as little as $10 per month has made the company’s software available to a much wider audience.
The move has paid off in a big way, with Adobe’s revenue at nearly $13 billion in its fiscal year 2020, up from just $4 billion in 2013. Adobe has gone all-in on subscriptions, announcing back in 2013 that it would stop developing new versions of its stand-alone creative software in favor of selling subscription products.
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Cheaper and even free Adobe alternatives are available, but that hasn’t been enough to derail the software giant's market leadership. Adobeīest known for creativity software such as Photoshop, Adobe ( NASDAQ:ADBE) sets industry standards.
Both revenue and earnings have been growing swiftly, even as the subsiding pandemic is altering the demand for SaaS offerings. But the company has been able to successfully transition to selling subscription-based software while maintaining its market dominance. Microsoft isn’t a pure-play SaaS company, and the stock is historically expensive relative to earnings. Teams aims to be a one-stop shop for collaboration by offering group chats, video meetings, and plenty of other features. Other SaaS products from Microsoft include Teams, the company’s collaboration software, which quickly gained subscribers during the pandemic. With Office 365 garnering around 52 million consumer subscribers, Microsoft has preserved its lead in the productivity software market. Microsoft eventually abandoned its PC-centric strategy by bringing first-rate versions of its Office applications to mobile devices, and it launched Office 365, a subscription-based version of Office. Microsoft’s dominance was tested by the proliferation of mobile devices, which do not use Windows, and by competition from Alphabet’s ( NASDAQ:GOOG) ( NASDAQ:GOOGL) Google in the form of Google Docs, Sheets, and Slides.
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Microsoft Windows is the standard operating system for PCs, and Microsoft Office is still frequently the productivity suite of choice. Microsoftįor 45 years, Microsoft ( NASDAQ:MSFT) has dominated the market for traditional software.
If you want to invest in SaaS companies that are reasonably valued, consider these three options: 1.
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