4 Underappreciated New Money Ideas For The Second Half Of 2020

Cloud-based SaaS companies have managed to generate outsized returns through the first half of 2020, and analysts at Piper Sandler picked four stocks that still hold promise.

SaaS Valuations Double The Average: Analyst Brent Bracelin said the stocks are benefiting from rising investor optimism tied to accelerating cloud and digital adoption in the coronavirus era.

SaaS median valuations on a rolling next-12-month enterprise value/sales basis have rebounded to new peak levels of 15 times after bottoming at 7.3 times this year in mid-March compared to the seven-year average of 7.5 times, the analyst said.

Emphasizing the lofty valuations, Bracelin said that in May, the 50 largest publicly traded SaaS pure-plays surpassed $1 trillion in aggregate valuation.

An incremental 7.5% monthly move higher has helped SaaS valuation levels on a combined basis surpass the valuation of Alphabet Inc Class A GOOGL.

Valuations Pose Risk: The peak valuation level leaves little margin for error entering the second half, Bracelin said.

Yet the analyst said that most consensus estimates in SaaS were reset lower earlier this quarter, factoring in near-term economic headwinds and uncertainty.

"Despite elevated execution risks entering the second half, we remain bullish longer-term with a near-term bias to 'buy on the dip' given improving prospects for rising cloud penetration rates that are at 10% today, up from 1% in 2010 with the potential to exceed 50% this decade." 

SaaS Stock Picks: Bracelin named four SaaS stocks as underappreciated new money ideas for the second half:

• Slack Technologies Inc WORK 
• Q2 Holdings Inc QTWO
• Rapid7 Inc RPD
• Cloudflare Inc NET

Piper Sandler has Overweight ratings on all four. 

See also: Analyst Says Microsoft Is Relatively Well-Positioned For A Crisis

Slack Shares In The Second Half: Slack has underperformed the group of direct beneficiaries of work-from-home tools, primarily on competitive concerns over the Microsoft Corporation MSFT Teams offering, Bracelin said.

The analyst sees plenty of room for both to co-exist and thrive.

"Based on new functionality and new partnerships we see an opportunity for WORK shares to re-rate higher into the second half against a backdrop of strong demand fundamentals."

Rapid7 A Consistent Performer: Rapid7, which reported a March quarter beat and announced the DivvyCloud acquisition, is consistently performing and broadening its product portfolio, positioning for gains in the back half of the year, the Piper Sandler analyst said.

Cloudflare On Track to Triple Business By 2023: Analyst James Fish said he believes Cloudflare is well-positioned for over 35% multiyear growth across Web content delivery networks and cloud security.

"Additionally, the convergence of networking, security, and CDN solutions into 'SASE' plays directly to Cloudflare's strengths," the analyst said.

Cloudflare can triple its business by 2023, he said.

17% Upside For Q2 Holdings: As banks expand their spend on digital and bank customers shift to interacting online, Q2 Holdings is poised to appreciate further, analyst Arvind Ramnani said.

Q2's automation efforts enabled banks to process a significant uptick in volumes related to the federal stimulus, the analyst said. 

Ramnani sees 17% upside to Q2's shares ahead.

Related Link: 10 Software Top Picks For 2020: Do You Own Them?

Photo courtesy of Slack.