Software as a Service Continues Huge Growth, Despite the Sell-Off

Oppenheimer recently held investor meeting with three of the SaaS product category leaders, and they have an Outperform rating on all of them. Just be advised that many of the SaaS stocks are also high-beta and high value names that are partially taking the brunt of the big selling even as the market hit new highs.

Ellie Mae, Inc. (NYSE: ELLI) may sound like a character from the Beverly Hillbillies, but the company is actually a leader in providing on-demand software solutions and services for the residential mortgage industry in the United States. Its mortgage management solutions streamline and automate the process of originating and funding new mortgage loans, facilitating regulatory compliance, and reducing documentation errors. With the growth in the mortgage industry rebounding after the market crashed over 5 years ago, the demand for the company’s products have soared as lenders and originators cope with new rules and regulations. The Oppenheimer price target for the stock is $35. The Thomson/First Call consensus figure is at $35.67. Ellie Mae closed on Friday at $25.99.

Salesforce.com, Inc. (NYSE: CRM) has been the momentum stock traders dream over the last few years. The analysts at Stifel say that while the stock trades in line with it’s fast organic SaaS peer group, they believe Salesforce should trade at a premium to the group owing to its dominant positioning in the powerful cloud, mobile and social computing waves, larger revenue run-rate compared to the group average, stronger cash generation and its TAM, which is substantially larger than the peer group average. The Oppenheimer price target for the stock is set at $71, and the consensus is right with them at $70.47. Salesforce closed Friday at $54.41.

Workday, Inc. (NYSE: WDAY) had previously done nothing but go up since the company’s IPO in the fall of 2012. After peaking at over $115 in late February, the stock got hammered when the biotechs and other momentum names were taken to the woodshed. In fact, the stock is off almost 30% from its high print on Feb. 27 and may be offering investors a very nice entry point. The company has the highest valuation in the Oppenheimer group, and the analysts say it is justified. They cite three specific reasons: 1) Oppenheimer’s 50% revenue growth forecast through fiscal year 2016 is the fastest organic growth rate within the peer group; 2) continued rapid customer adoption of the Human Capital Management (HCM) application; and 3) market potential of the company’s big data, recruiting, student and financial management applications. The Oppenheimer price target for the stock is posted at $110, and the consensus figure is at $107.40. Workday closed Friday at $80.68 down almost 4%.

Keep in mind that Oppenheimer also recently identified 6 technology and communications buyout candidates.

The Oppenheimer analysts — and others on Wall Street — think that the demand for product from these three top companies is very strong. They also believe that each company is positioned as the leading technology innovator within their specific categories. They note that while investor sentiment is mixed, and has slipped on the sector some, the huge demand from replacement orders and new customers will continue at a fast pace. They suggest investors looking to own these stocks use any pullback as a chance to initiate a position or add more to an existing one.