Credit Suisse's Top SaaS 2017 Picks

Really interesting report from Credit Suisse. Thought it might be of interest to a few people on this board. It’s top two picks for the next year were Ultimate Software (ULTI) and 2U (TWOU). How did they make these picks?

New, proprietary Credit Suisse SaaS Unit Economics Index. Our new, proprietary subscription software unit economics (customer lifetime value / customer acquisition cost, or CLTV / CAC) benchmark analysis (see Figures 1 – 3) evaluates the different yields of investments, potential operating leverage at scale, and overall financial stability of 37 SaaS vendors and suggests those that show superior unit economics (e.g., stronger retention rate, greater recurring revenue mix, higher recurring revenue gross margin, and more efficient sales & marketing spend for each incremental dollar of recurring revenue) should typically warrant a premium valuation to the peer group average. Based on this new fundamental analysis, we believe that there are several SaaS names in our coverage that are currently trading at a discounted valuation, particularly ULTI.

Here’s its reasoning behind 2U (TWOU):

2U (TWOU) – Outperform, TP$43 (~34% Potential Upside): We continue to believe that the traditional higher education market is poised for disruption, as evidenced by the recent strong uptick in demand from both new and existing university partners, which prompted management to raise their 2017 launch target to ten new programs (up from previously-stated nine and represents a significant increase from six in 2016). Our recent discussion with the CEO included: (1) an update to the status of the Yale PA program, which is still in the accreditation process but is now accepting student applications, which we believe demonstrate Yale’s commitment to the TWOU-enabled program; (2) recent program cohorts continue to perform well; and (3) that its new program pipeline is very robust. In our view, TWOU has the vision, market opportunity, and leadership to execute against its near-term / long-term financial goals (recently introduced a three-year financial outlook calling for >+30% yr/yr annual revenue growth and low single-digit % adj. EBITDA margin expansion each year), especially given the high strategic value that TWOU provides to university partners, including its deep domain industry expertise, strong marketing / recruiting capabilities, and best-of-breed technology platform and services.

Don’t know too much about either company, but I believe ULTI is a competitor to PAYC if I’m not mistaken.

There are seriously lots of great graphs and charts in the report. It’s definitely worth browsing through when you get a chance.

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Just realized I forgot the link. Sorry!…

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Sorry Matt, the link doesn’t work. It sounds like an interesting article though so I’d love to be able to see it.

Is the link not working for anybody else? When I just clicked it, it worked. But here it is again just in case:…

Hochfeld links to the report in his latest article which is how I found it, in case this link doesn’t work again.

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It works fine forme. If you’re e*trade customer this report is available to you there also.

TWOU is trending towards positive earnings. I’m initiating a small position to force me to track and study its earnings progress more carefully.

Thanks for bringing this company to our attention.


Really interesting report from Credit Suisse.

Matt, I just wanted to say a big thanks for bringing this to the board! This CS document has absorbed most of my free time this weekend. It exposed me, and apparently even Bert, to some companies I hadn’t heard of, and for that I am entirely grateful. In looking at the two companies they recommend and trying to digest the rest of the report as well, I did notice that there are many limitations to CS’s analysis, as to any kind of number crunching.

For example, take ULTI. I’m glad to see Saul passed on it. Even reading Bert’s pieces on each company it seems PAYC is much more exciting to him as well. PAYC has been growing faster, and if anybody in that space has a secret sauce, I think it’s PAYC. (Sidebar/note to self: I’m starting to realize just how many names are in the space. Makes me reconsider how large I’ve let my PAYC position become. PAYC is great, but it’s by no means SHOP in terms of dominance…yet.) But it seems like the CS bottom line is that ULTI looks more favorably priced as of Jan 6 when you look at the numbers a certain way (ie their way). That is interesting, but not particularly useful if one favors a company over another for qualitative and competitive reasons, as I think one should when one is bothering to pick individual stocks at all.

I was interested in TWOU, though I knew nothing about the business. I checked out their website and their product looks amazing. The actual phrase “no back row” seems a little hokey, but the features displayed in the video are stunning. Bert wrote on them way back in May:… and to me it sounds like there is a lot of uncertainty surrounding their business model and a lot of macro concerns and I just don’t think I want to get involved with that. Also very interestingly, Bert mentions more than once that while they refer to their own business model as SaaS, it really isn’t. Obviously Credit Suisse doesn’t make the distinction that Bert does.

Also, and this is really strange, TWOU is absent on the first 3 charts in the report, the CLTV/CAC charts which I kind of understand to be the secret sauce of CS’s whole analysis. Head scratcher.

TWOU also has a competitor on the report that is growing faster than they are: INST. They actually jumped out at me in a HDP-type way: they’re very EPS negative for now, but they’re growing fast and they’re cheap on a P/S basis.

I also wish they would have said something more about TEAM. As the #1 company on the report from a CLTV/CAC basis, and not nearly as expensive as VEEV (the #2), and not too much more expensive than their pick ULTI (the #3), I don’t see why they didn’t at least mention this company. I’ll certainly be interested in looking into it further. Think I’ll start here:… and I remember Saul had a tiny position for a couple months too.

Thanks again,