NOW, ADSK, and TEAM: 3 SaaS Stocks with Solid Upside Potential

SaaS (Software-as-a-Service) stocks have taken a beating amid the rate-induced market rout. Though many SaaS stocks are profitable, their valuations were stretched going into the back half of last year. With rates on the rise and a Fed-mandated economic downturn likely on the horizon, such stocks have been punished severely. We used TipRanks Comparison Tool to look at three top SaaS stocks that look oversold (NOW, ADSK, and TEAM) and are overdue for a bounce, according to Wall Street.

Though secular trends are still very much at the backs of the former high-flying SaaS stocks, it remains unclear when such names will get their groove back. With so much uncertainty on where rates will settle in the Fed’s move to bring inflation down, it seems like a bet on any high-growth tech stock is a bet that the Fed will begin to think about cuts once its hike cycle is over.

For now, investors got a bit too ahead of themselves regarding the Fed and the possibility of rate cuts in the future. With August’s CPI report coming in a bit hotter than expected, tech crumbled like a paper bag on Tuesday. I think it was a bearish overreaction, just like the bullish overreaction to the better-than-expected CPI report delivered a month prior.

In time, growth stocks, including those in the cloud-based SaaS space, will move higher under their own power again. In the meantime, the market will treat them as rate-tied trading instruments. Volatility in such names is sure to be off the charts. In any case, each SaaS company is taking steps to improve its footing to rise out of these macro headwinds in a position of power. By doing such, the post-recession rebound in share prices could have the potential to be fierce.

ServiceNow (NYSE: NOW)

ServiceNow is a $88 billion digital workflow company with a focus on enterprise IT. In its latest quarter, revenue rose to $1.75 billion, up 24% year-over-year. Had it not been for the strong U.S. Dollar, revenue would have risen around 30% year-over-year, comfortably ahead of the consensus.

Indeed, ServiceNow’s ITSM (IT Service Management) platform is considered the gold standard in the industry. As the firm leverages its strong network of loyal users, ServiceNow may be able to bolster growth as it spreads its reach into new realms under the IT umbrella. ITOM (IT operations management) and HR service delivery are other fields in the enterprise where ServiceNow could find tremendous success.

With plenty of intriguing growth drivers, ServiceNow seems more than capable of averaging at least 25% revenue growth over the next few years. All the while, I expect the firm will continue to drive margins and profits higher. Further, with former SAP (NYSE: SAP) top boss Bill McDermott at the helm, ServiceNow has one of the brightest minds in the CEO seat.

At writing, NOW stock trades at 13.3x sales after partially rebounding from a 42% peak-to-trough tumble. That’s still expensive, but seeing as its high growth rate is sustainable, with room for margins to improve, the multiple may not be as lofty as it seems.

What is the Price Target for NOW Stock?

Wall Street seems to think NOW stock is a great deal here, with a “Strong Buy” rating, 24 Buys, and just two Holds. The average year-ahead upside is 24.1%, based on the average ServiceNow price target of $547.68.

AutoDesk (NASDAQ: ADSK)

AutoDesk is a computer-aided design (CAD) software developer that’s proven essential for architects, engineers, construction workers, and artists. With such an incredible portfolio of CAD tools in the cloud, AutoDesk is a wide-moat firm that deserves a hefty premium.

At around 9.8x sales and 82.2x trailing earnings, AutoDesk is still richly-valued, even though it’s off more than 40% from its highs. Though AutoDesk’s products are incredibly sticky, the AEC (architecture, engineering, and construction) industry is cyclical. With a recession year up ahead, AutoDesk could face growing headwinds as projects slow down.

In any case, AutoDesk is poised to continue spending to keep industry rivals further at bay. Thus far, AutoDesk has done a terrific job of differentiating itself in an industry that can be pretty difficult to thrive in.

Last year, Autodesk acquired water infrastructure software firm Innovyze for $1 billion cash. With valuations contracting across the SaaS scene, I expect AutoDesk to use its $923.2 million cash pile.

In short, AutoDesk is a dominant SaaS company in a cyclical industry. With so much selling in anticipation of a slowdown, I view ADSK as cheaper than its multiples suggest.

What is the Price Target for ADSK Stock?

Wall Street loves AutoDesk, with 11 Buys and two Holds, giving it a Strong Buy rating. The average ADSK price target of $266.23 implies 32.05% upside potential.

Atlassian (NASDAQ: TEAM)

Atlassian, the Australian company that creates software for software-development planning, got crushed, falling as low as 62% from its peak before recovering modestly.

Undoubtedly, its valuation got stretched in 2021, and it still looks a tad rich, given the trajectory of rates. The stock goes for 23.3x sales. Nonetheless, Atlassian is a high-caliber company.

Many programmers are too familiar with the slate of Atlassian products, from Jira Service Desk to Confluence. Though growth was robust in the latest quarter (up 36% year-over-year to $760 million), there’s concern that the firm could hit a bump in the road as tech firms continue cutting staff.

In any case, Atlassian is focusing on enhancing its tool set to help software development teams improve their productivity.

What is the Price Target for TEAM Stock?

Wall Street loves Atlassian on the dip, with a Strong Buy rating, 10 Buys, three Holds, and a 21.2% upside target. This is based on the average TEAM price target of $309.50.

Conclusion: Strong Growth Can Support SaaS Stocks

SaaS stocks have been battered, and while they still look frothy, their strong growth profiles could keep them steady in the face of a downturn.

Disclosure