ARK Invest white paper on SaaS

Free with registration (they don’t check the email you provide, btw):

The title is:
Could 2020-2030 be the Golden Age?

• In 2019, SaaS companies generated $100 billion in revenue and accounted for 25% of the enterprise software market. We expect SaaS revenue to grow 21% at a compounded annual growth rate (CAGR) until 2030, reaching $780 billion or 81% of the enterprise software market.
• Enterprise software companies are going public at a much faster rate than consumer technology companies. Between 2009 and 2019, 98 enterprise software companies went public, quadruple the 24 consumer tech IPOs. Nearly 80% of enterprise software IPOs were SaaS companies.
• During the same ten years, enterprise software IPOs returned nearly 23% at a compound annual rate, nearly triple the 8% delivered by consumer tech IPOs.
• SaaS companies increasingly have employed viral and self-serve customer acquisition strategies, improving their sales efficiency almost three-fold and enabling not only rapid growth but also positive cash flows according to our research.

I’ve just skimmed it so far, but there’s a ton of good information in there. For newbies, it defines SaaS and includes a short history, starting with of course.

One really interesting section that I think will resonate with many here:
What Makes SaaS Different This Time?
With 5 reasons outlined and expanded in details.

Another section I found interesting was on the differentiation between consumer and enterprise SaaS models:
As a group, enterprise software IPOs have outperformed consumer tech IPOs over the past years. Between 2008 and 2020, the 24 US consumer tech companies that have IPO’d and remain public have delivered an 8% median compounded annual return, roughly a third of the 23% associated with the 98 enterprise software IPOs in the same position.

To be fair, while the performance of enterprise relative to consumer technology stocks appears positive, it comes with some important caveats. First, the years including 2016 through 2019 were particularly productive for SaaS IPOs, with Zoom, DataDog, and Crowdstrike all delivering triple digit returns. Second, software IPOs often “pop” on their first day of trading but most investors do not have access to IPOs at their offering prices. Third, as of mid 2020, SaaS company valuations are near historic highs.18 Investment returns are subject to end-point sensitivity and valuations.

That says things that we have been saying here for a while now, mentioning 3 of our favorite stocks by name. I hadn’t considered a differentiation between SaaS for consumer vs enterprise, so the discussion in the paper was very interesting to me.

I really liked this conclusion:
According to industry forecasts, annual SaaS revenue growth will decelerate from 16.1% in 2019 to 13.6% by 2022,23 reflecting, in our view, “reversion to the mean” thinking. Instead, as shown above, we believe that at 25% share, SaaS probably hit an inflection point during the coronavirus crisis and, according to classic S-shaped adoption, is likely to capture an increasing share of the enterprise software market. If our forecast is correct, SaaS revenues will grow at a 21% compound annual rate for the next decade, topping $780 billion or 80% of the enterprise software market by 2030. (emphasis added)

Anyway, there appears to be a ton of useful information in this free report. Highly recommended reading.