We recently compiled a list of the Jim Cramer’s Bold Predictions About These 10 SaaS Stocks. In this article, we are going to take a look at where CrowdStrike Holdings, Inc. (NASDAQ:CRWD) stands against the other 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).
Security personnel at their consoles, monitoring a global network of threats in real-time.
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 breach 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?”
Overall CRWD ranks 3rd on our list of the SaaS stocks Jim Cramer talked about. While we acknowledge the potential of CRWD 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 CRWD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.