SaaS Companies to Consider Investing In
We’ve spent a lot of time discussing companies like Netflix and Amazon that derive a lot of their value from the consistent income they receive from clients. These B2C companies get consistent income from their customers and that helps increase their purchasing power and inform their strategy better.
What we haven’t focused on enough is B2B versions of this. Namely, the Software-as-a-Service (SaaS) sector. Salesforce was one of the first of these to emerge and do will in the last decade, but there are several other players I’d like to focus on. Slack and Microsoft have two very different strategic directives and capabilities, but follow a very similar model now. Microsoft Endures and ThrivesMicrosoft was forced to undergo significant changes when they started stagnating around the end of Steve Ballmer’s time.
The shift to SaaS meant an almost complete turnaround from all the business models they were used to making money in. Enterprise software used to be sold per license. Companies would get the registration key and have “lifetime” access, although what usually happened was an update to the software would be released and the previous software would become outdated and less useful.
What the SaaS model does is allow for more agility for both parties. Companies can obtain access for users on a monthly basis, rather than buying a license for a lifetime. This also helps manage expenses as a monthly variable cost rather than larger fixed cost. From Microsoft’s perspective, they get that recurring income and are better able to serve their users.
Last week, they broke into the trillion dollar valuation zone, which is a massive milestone that only Apple and Amazon have reached before. Now they need to focus on improving their product. All enterprise software is designed to be easily implemented, and basically comes with an outsourced IT department. This lowers the friction that would normally prevent customers from moving between suppliers, and takes away a lot of Microsoft’s initial advantage. Granted, they do have existing relationships to lean on, but as the products become easier to demonstrate and spread virally, this advantage won’t be as important.
Slack as the New Contender
What has made Slack so powerful is how it is completely disrupting the way companies communicate internally. Email is a hugely outdated method, and by providing a frictionless internal communication method, they can facilitate easy adoption in a viral manner.
Their IPO on June 20th is far more interesting than Uber’s or Lyft’s because of the proven and profitable business model they are following. Winning clients is far harder when you haven’t focused as much as they have on easy adoption. Users can easily send Slack invitations to their friends, get them to join a team, and turn these people into a new champion of their brand. This level of viral customer acquisition makes them a prime target to buy once the IPO has settled down.
What To Do With This Information
In terms of investments, is there more upside to be had? Microsoft has done a great job of moving away from being a Windows-focused company, and adapted to the reality that Apple was here to stay. They could end up being the dominant SaaS player due to their existing relationships, although Slack will always be in competition and not have the ties to the past (both culturally and in terms of products) to prevent it from advancing.
I would suggest buying Microsoft AND Slack (when it IPOs). Microsoft is still everywhere in our lives and the trajectory it is on implies continued improvement. The trillion dollar valuation is completely reasonable, and it is a good buy-and-hold option. Slack has huge potential upside and is far more “stable” and industry than consumer-facing companies like Uber or Lyft.
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