Needham, the investment bank and financial management firm that underwrote Google’s IPO back in 2005, held its annual SaaS 1×1 Conference last week. This event, the ninth one the firm has hosted, highlights the rise of Software-as-a-Service in the tech field, and offers companies a chance to strut their stuff for some of Wall Street’s top analysts.
While the tech giants get the bulk of the press, three new reports from the research arm of Needham highlight the potentiality inherent in the small-cap members of the software industry. We’ve used TipRanks’ Stock Screener tool to learn why Needham’s analysts picked these particular Software-as-a-Service companies, and found compelling reasons. These stocks hold Strong Buy consensus ratings, and more than 35% upside potential from high-rated analysts.
PROS Holdings (PRO)
This company occupies a necessary niche in the business software world, leading the pack in price optimization software. PROS also offers product packages to track sales effectiveness and revenue management. The company is based in Houston Texas, a growing tech hub, and includes offices in London, Paris, and Sydney. PROS reported $197 million in fiscal 2018 revenues.
While the company reported an operating loss in its most recent quarter, the results were not all bad. Revenues were up 30% year-over-year, the EPS loss was not as deep as expected, and the losses have been growing sequentially less since Q1 2019.
Investors have been impressed with PROS, and the stock has heavily outperformed the markets in 2019. The S&P 500 is up 24% year-to-date, while PRO shares have gained 73%, beating the index by nearly three times.
This company’s clear strength in its niche and in the stock market has caught the attention of Needham’s Scott Berg. Berg is especially impressed by the company’s hiring plans, pointing out that the PROS is showing strong sales and looks to expand the sales force. He writes, “PROS is actively hiring in both B2B sales and professional services to manage customer success and implementations. While B2B Americas sales were very strong in Q2 highlighted on the earnings call, B2B Europe was highlighted on the Q3 call [and we] don’t interpret any slowdown in Americas.” Berg puts an $80 price target on PRO shares, suggesting an upside of 44%. (To watch Berg’s track record, click here)
Wall Street tends to agree with the analyst’s confidence on the Saas stock, considering TipRanks analytics reveal PRO as a Strong Buy. Out of 7 analysts polled in the last 3 months, 6 are bullish on PROS stock while only 1 remains sidelined. With a return potential of nearly 36%, the stock’s consensus target price stands at $76. (See PROS stock analysis on TipRanks)
With PS, we move from sales-related software to the education field. This company got its start in business training, and in 2007 moved its courses online as video offerings. Since then, it has expanded to include other training software modules. Pluralsight has maintained an active expansion policy of acquisitions, buying Orlando-based Code School in 2015 for $36 million, Adobe software training company Train Simple in 2016, and earlier this year announced the purchase of GitPrime for $170 million.
Despite Pluralsight’s active expansion, and strong niche it holds in the business training world, the company has been posting heavy earnings losses despite rising revenues. Q2 saw revenues of $75 million, up 41% year-over-year, but an EPS loss of 6 cents per share. The Q3 numbers were $82 million in revenue and EPS loss of 8 cents. The Q3 free cash flow came in at a disturbing figure of negative $6.6 million.
Share prices dropped sharply after the Q2 report, although they have been stable since. PS is down 23% year-to-date. On a positive point, corporate insiders have been buying up this stock; purchases increased by $1.37 million in the last three months. The company’s trailing 12-month asset growth stands at 139%, also a good sign.
Like PRO above, this stock was reviewed last week by analyst Scott Berg. Again, he was impressed by management’s confidence, in this case, in addressing headwinds. Berg writes, “We maintain our belief that the company’s sales execution will improve meaningfully in 2020.” Backing this up, he points out, “Changes include bringing in people from the product team to get deals over the finish line and greater investment in pre-sales teams. We believe these changes should support improved execution in 2020 along with a catch up on sales capacity. The company now has just under 290 reps and we believe to support 2020 operating plan another 10 reps are needed by year end, which we view as achievable.”
Berg puts a $25 price target on the stock, showing his own confidence in a 38% upside. Overall, PS has a Strong Buy consensus rating based on 4 Buys and 1 Hold, and the average price target is $24.20. This suggests an upside of 34% from the $17.99 share price. (See Pluralsight stock analysis on TipRanks)
Chegg provides an interesting service in the educational software industry, making textbook rentals available online. In addition to ebooks, the company also provides study guides, writing guides, flashcards, and online tutors. Like Pluralsight in the business realm, Chegg has been active in expanding through acquisition, and recently bought out WriteLab for $15 million and Thinkful, a coding school, for $80 million.
Chegg has been consistently beating earnings expectations through 2019, and the stock is up 28% year-to-date. For Q3, CHGG showed a 27% revenue increase, to $94.2 million. More importantly, the company posted a 29% increase in subscribers, to 2.2 million, and boasts 138 million total views of Chegg Study content. The company raised its forward guidance for CY2019 to the $407 to $409 million range, and predicts total revenues for 2020 of $520 million.
Needham was impressed; 5-star analyst Ryan MacDonald gave the company a $50 price target, suggesting a 36% upside after the SaaS 1×1 Conference. (To watch MacDonald’s track record, click here)
MacDonald sees internationalization as the path for Chegg moving forward, and wrote, “Investment in this area is already underway, with the acceptance of Canadian currency on the platform, and the identification of 10 countries with a strong English language presence that will act as the starting points for full international expansion. Though there are already a few hundred thousand non-US subscribers on the platform, management has yet to actively try to pursue an international audience.”
How does MacDonald’s bullish forecast echo against the word of the Street? Quite positively, it seems, as TipRanks analytics exhibit CHGG as a Strong Buy. Based on 5 analysts polled in the last 3 months, all 5 say “buy.” These analysts suggest that if everything goes as planned, CHGG will be a $45 stock in the next 12 months, implying about 20% return. (See Chegg stock analysis on TipRanks)