Many high-growth software stocks have crashed over the past few months as rising interest rates have caused a turnaround towards valued stocks. However, those bewildered investors also threw a lot of babies using water baths.
Avoiding all software stocks is myopic, as the sector can still generate market-beating returns in the long run. So today, I’ll highlight three software stocks that are still solid buys for 2022 and beyond: Service Today (NYSE: NOW), Adyen (OTC: ADYE.Y)at Twilio (NYSE: TWLO).
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1. Service Today
ServiceNow helps companies manage their digital workflows using subscription -based cloud services. It ended in 2021 with more than 7,400 customers, including approximately 80% of the Fortune 500, and 1,359 of its customers have an annual contract value of more than $ 1 million.
The ServiceNow business was not shocked by the pandemic. Its subscription revenue will rise 31% in 2020 and grow 28% in 2021, and it expects 28% growth in 2022. It also plans to generate at least $ 15 billion in annual revenue in 2026, representing a compound annual growth rate (CAGR) of at least 20.9% from its $ 5.81 billion adjusted revenue in 2021.
ServiceNow’s growth rates are consistent because it regularly maintains a renewal rate of 99% and it benefits from the secular demand for digital workflow management services in many industries. Its gross margins continue to remain above 80%, and it has become profitable on a generally accepted accounting practices (GAAP) basis in both 2020 and 2021.
Those solid earnings make ServiceNow safer to play than many of the sector’s unprofitable high -growth stocks. It’s not cheap at nearly 80 times forward revenues and 16 times sales this year, but ServiceNow’s strengths can be justified in those appreciation premiums.
2. Adyen
Adyen is often compared to PayPal at Blockbut the Dutch digital payments company actually operates a different business model than its two American counterparts.
Ayden does not provide a consumer -facing app like PayPal or Block. It also does not engage in cryptocurrency trades, and it does not issue any physical debit cards linked to its platform. Instead, it will develop backend software that can be integrated into their own online, mobile, and in-store payment systems to accept more than 250 payment methods. Merchants can also use Ayden’s software to build their own branded mobile wallets.
In 2020, Adyen’s revenue will increase by 28% while its processed volume will grow by 27%. Both growth rates have dropped since 2019 when brick-and-mortar retailers closed, but that slowdown was partially offset by its growth in online sales. In 2021, its revenue will increase by 46% while its processed volume will increase by 70%. It attributed that acceleration to the reopening of the business and relaxed locking steps.
Adyen is firmly profitable, but earnings before interest, taxes, depreciation, and amortization (EBITDA) give us a clearer glimpse of its underlying growth. Its EBITDA rose 27% in 2020 and grew another 57% in 2021.
Adyen’s growth will inevitably slow as it goes beyond its post-lockdown recovery, and its stock is not cheap at nearly 70 times this year’s EBITDA and 44 times this year’s sales. However, investors looking for a simpler alternative to PayPal and Block should still look more closely at Adyen.
3. Twilio
Twilio’s cloud-based platform handles integrated text message, voice call, video, and communication-based security features for mobile apps. Instead of building those features from scratch, the developer simply outsources them to Twilio using a few lines of code.
Twilio’s first-mover advantage in this niche market has gained huge customer liking Lyft, Airbnbat Twitter on the platform based on its use. It has also acquired smaller platforms to expand its ecosystem with new features.
Twilio’s revenue rose 55% in fiscal 2020 and rose 61% in fiscal 2021. Some of that growth came from acquisitions, but Twilio expects its organic revenue to increase by more than 30% annually. -years for at least the next three years.
The bears will argue that Twilio is still not profitable, and its gross margins are being squeezed by competitors and new wireless carrier fees. Those concerns are valid, but Twilio believes its annual gross margin will expand from 51% in 2021 to more than 60% as it sells additional services and locks in more favorable cloud infrastructure rates. .
Twilio’s stock overheated somewhat in early 2021, but the stock has halved in the past six months and is now trading at just nine times sales this year. Because of that lower price-to-sales ratio, Twilio makes a compelling investment for growth investors that can curb near-term volatility.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis-at least one of us-helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.