KeyBanc Says SaaS Investors Should Remain Bullish, But Selective

SaaS stocks continue to move higher, and the EV/S multiples for the 55 biggest stocks stand at 7.2x and are closing in on a five-year peak of 8.8x, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Brent Bracelin made the following rating and price changes:

• Alteryx Inc AYX downgraded from Overweight to Sector Weight with no assigned price target.
• Five9 Inc FIVN downgraded from Overweight to Sector Weight with no assigned price target.
• Paycom Software Inc PAYC maintained at Overweight with a price target raised from $105 to $127.
• Zendesk Inc ZEN maintained at Overweight with a price target raised from $43 to $53.
• MINDBODY Inc MIB maintained at Overweight with a price target raised from $41 to $47.

The Thesis

Cloud software, or SaaS, stocks are among the hottest indices in the market, Bracelin said in an industrywide report.

The SaaS 55 index gained 52 percent in 2017 and has notched another 26 percent so far in 2018, which implies investors could remain bullish — but high fundamentals "leave little margin for error." Investors should consider moving toward a "more valuation-sensitive stance" for new investments, Bracelin said. 

Alteryx

Alteryx's next-12-month EV/S multiple has grown from 8x to 12x since its initial public offering, Bracelin said. The valuation now factors in the company's strong fundamentals and its status as one of the "top 20 AI all-stars in technology," the analyst said. 

Five9

Five9's stock has gained more than 90 percent over the past year as the company benefited from solid execution and market share gains within the cloud contact center software segment, Bracelin said. As a result, the stock's NTM EV/S multiple has expanded from 4.7x two years ago to 8x, which creates a balanced risk-reward profile — even though it can likely sustain a high growth rate over the coming years, according to KeyBanc. 

Related Link: Benzinga's Top Upgrades, Downgrades For March 13, 2018

Paycom

Paycom appears well-positioned to sustain a 25-percent or more revenue growth rate and simultaneously support higher margins, Bracelin said. KeyBanc's revised $127 price target is based on a 42x FCF multiple on 2019 estimates and is justified by the company's self-service approach with a direct sales go-to-market strategy, he said. 

Zendesk

KeyBanc's new $53 price target implies a target EV/S multiple of 8x on 2019 estimates. This multiple is roughly in-line with the current 9x NTM multiple and also in-line with peers trading at a 7.8x multiple, Bracelin said. 

Mindbody

The analyst's revised $47 price target is based on an EV/S multiple of 7.5x on 2019 estimates. This multiple is in-line with the current FTM EV/S multiple of 7.5x and a slight discount to its peer stocks that trade at a 7.8x multiple, Bracelin said. 

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