The Motley Fool’s growth strategy in recent years has been to launch lots of higher-end “portfolio” services in the $1,000-2,000/yr range, usually with some kind of thematic focus… and the menu of offerings is getting a little insane now. When I launched Stock Gumshoe in 2007, the Fool had five or six different paid newsletters… now I think the total is 27, most of them at premium prices.

And the one that caught my eye with an ad recently is an example of how micro-focused these can be — they’re pitching what they call Everlasting: SaaS Superstars, which seems to have a lot of overlap with other portfolio services they’ve sold recently, particularly their Everlasting: Cloud Disruptors service.

It’s not a bad idea from a marketing perspective, naturally, this would be a reason to buy the Motley Fool if it were publicly traded, and the Agora/Stansberry affiliates that went public under the MarketWise (MKTW) name seem to have taken this to an even more dramatic extreme in recent years, so it’s not like they’re alone.
Launching so many newsletters and services under the names of some of their most popular editors may strain credulity that those pundits could possibly have deep thoughts about a dozen or more different topics or companies each week or each month, but I’m sure they’re relying on deep benches of analysts who do most of the actual work in assessing these companies.

So we should not be surprised that David Gardner’s phenomenally successful Rule Breakers franchise at the Fool has now spawned nine different niche portfolio services that each carry the Rule Breakers name (at $1,999 each), as David himself steps away from stock picking but they look to extend that brand… or that brother Tom Gardner’s world of “Everlasting” stocks has grown from his half of the Motley Fool Stock Advisor team to a new service called Everlasting Stocks a few years ago, and now has spun off now ten different Everlasting portfolio services (also mostly at $1,999/yr).

All powerful brands try to extend themselves, though not always with quite as strong an “upsell” — I think there might be 40 different flavors of Oreos now, including the sublime (mint chocolate) and the horrifying (apple cider donut), but they’re pretty much all the same price. How far away are we from an Oreos as a Service (OaaS) platform, with premium flavors only for the top-end members? The mind boggles.

But I’ve gotten off track here — there are some “secret” stocks to reveal for you, dear friends, and the pitch this time is for Everlasting: SaaS Superstars at a discounted price ($1,299 for the first year, no refunds, pretty much what they offer whenever they highlight one of these $1,999 services).

The big picture claim is that we’re entering a period of “hypergrowth” that offers opportunities in SaaS that are far greater than was available in past generations… and the spiel uses the huge success of Walmart, then the exponential step up from there at Shopify, to illustrate the shift…

“By 1967… Wal-Mart… had already hit a remarkable milestone, opening its 24th store in just five years.

“By the year 2000, after 38 years in business. Walmart had opened nearly 4,000 stores and had become the growth story of the 20th century.

“Fast-forward to 2006. A snowboarder from Ottawa launched a new online business named Shopify. Within 5 years Shopify had launched 18,200 stores….

“Today, in just its 15th year in business, 1.75 million storefronts use Shopify.

“And Shopify is up an astounding 8,953% since its IPO just over six years ago.

“Welcome to the era of ‘hypergrowth.’

“It’s an era of new business realities…

“Where growth can reach incredible heights…

“Profits margins can grow far beyond what Sam Walton imagined…

“And we’re confident the benefits of being in early to the world’s greatest businesses have never been greater.”

And we already know it’s called SaaS Superstars, so we know they’ll be recommending subscription-based businesses in the software space (SaaS just stands for “Software as a Service,” with subscriptions to software and updates, typically offered online and on demand through the cloud, replacing the old “buy the box” software programs)… but here’s where they explain why they like that strategy:

“… when you look at The Motley Fool’s biggest winners over the past 28 years that we’ve been picking stocks, almost all of them have a recurring revenue model as part of their business strategy.

“And even when it’s NOT married to software solving society’s problems, it’s pretty darn lucrative.

“But this recurring revenue model really hits its stride when married to software and a BIG market. With all of the acceleration and change in the world, this is where I really think we can find the big winners – at the cutting edge of that rapid shift.”

And then they start teasing a few of their favorite picks from this service — like most of these higher-end Fool services, this is not a “two picks a month” newsletter, you buy in to learn about an allocated portfolio of stocks, 12 in this case, and get updates and perhaps some additions to (or subtractions from) that portfolio over time… and this time, they drop hints about three of the stocks in this particular Everlasting portfolio, so let’s go through the clues and get some names for you…

“Stock #1: You’ve probably heard of Atlassian, the stock that is recommended across 15 different Motley Fool services. Atlassian ended its hypergrowth phase back in 2016. But this little-known competitor is right in the middle of hypergrowth, having just delivered 59% year-over-year revenue growth…and it has only tapped about 1% of its estimated total addressable market…”

When they talk about “periods of hypergrowth” they use the definition, “two years in a row of 40% or higher revenue growth” — Atlassian is still a high-growth company, though it’s not growing quite that fast now (it’s more in the 25-30% range).

And that “just delivered” bit isn’t particularly accurate, that was the growth rate for this secret company’s last fiscal year (ending January 31), but the Thinkolator sez this is a pitch for Asana (ASAN), which has actually been accelerating its revenue growth in the last couple quarters (to a pretty astonishing 72% last quarter).

And yes, Asana is a teamwork/collaboration platform, not so different from Atlassian in concept, tying in dozens of different services (email, Salesforce, Adobe, Microsoft, Dropbox, Slack, etc.) to create a unified platform to keep everyone on the same path. I’ve never tried it, but I’ve been impressed with their leadership and their strategy and I spoke positively about them back in June in a comment for the Irregulars — sadly, I didn’t buy shares at the time (the stock has more than doubled since then).

ASAN is one of the very many smallish Cloud/SaaS stocks that trade at ludicrous valuations, though it stands out as being one of the fastest-growing and most richly valued, trading now at about 60X trailing revenues (and 35X their expected 2023 revenues), so you’ll really have to have some confidence in the company and their strategy to make that bet. The addressable market is certainly enormous, every company needs some sort of team collaboration software platform, but at this valuation they’re probably going to have to surprise and delight investors every quarter to keep people happy — and they’re doing so right now, so perhaps that continues. Not having personal experience using the platform, or a lot of confidence in how unique it is relative to competitors, I can’t talk myself into buying at this price, but it is surely an impressive company.

If you want a little background, I would suggest Patrick O’Shaughnessy’s February interview with Asana co-founder Dustin Moskowitz (who was Mark Zuckerberg’s roommate at Harvard and co-founded Facebook, leaving to start Asana about a decade ago). It’s always interesting to see mega-billionaires who start something new, and Moskowitz is a really interesting guy — it may well be that they’re building something truly grand at Asana that will become the new standard for professional teamwork, and if so it’s probably worth buying even at these nutty valuations if you can wait a few years for the story to play out, I’m just not quite comfortable enough. And that’s probably mostly because of the heavy exposure I already have to so many of these high-growth SaaS stories in my portfolio — if investor sentiment turns, these stocks tend to fall together.

On the financials, Asana won’t be making a profit anytime soon — they are spending heavily to fuel their revenue growth and try to take market share or establish a market, convincing companies that they need this kind of platform. They are on pace to continue blowing through a couple hundred million dollars a year building the business… and they can afford it, of course, they’ve got $400 million or so in cash available and also cover some of their costs with share issuance to employees, but that means this is going to be a “story” momentum stock for the foreseeable future, it will probably have big moves both up and down as quarters come in better or worse than expected.

Atlassian (TEAM) has done phenomenally well too, of course, and the narrative is that these companies have been driven in large part by the need for collaboration software during the COVID “work from home” shift (though neither company really saw a huge acceleration of revenue growth last year) — TEAM now carries a market cap 5X the size of Asana, right around $100 billion, and has certainly rewarded the investors who took a chance on a little-known Australian company when they came public six years ago … their growth has slowed down markedly of late, they’re in the 30% neighborhood these days (even when they were Asana’s size they weren’t growing at 60-70%, but they did hold 40-50% for a while), but TEAM is also at a wildly premium valuation and still trades at almost 50X sales. I will note that I’d be more attracted to Asana than Atlassian today if I had to choose one of them, though I’ve never owned either.

If you’re feeling pessimistic about these companies because of their huge size, I might also note that most of us who’ve been investing for a couple decades or more probably really need a “reset” of what we think of as “too big to grow” … I know I’ve been struggling with that in recent years. In these days of trillion-dollar giants at the top of the market, natural tendencies toward global monopolies and oligopolies in the technology space, and the massive and rapid scalability of online businesses, $20 billion and $100 billion probably aren’t as big as we think they are, not when startups are getting to $10 billion valuations almost overnight in some cases. Many of us used to imagine a ceiling for how big a company could get, and how big companies would naturally slow down because of the “law of large numbers”, but it seems like that ceiling has been blasted away in the past five years. The scale of the business world has shifted under our feet, and maybe it shifts back someday… but probably not. It’s hard to stuff the monopoly back in the bottle after it has swallowed the world.

I got off track again there, didn’t I? Sorry about that. Back to the tease…

What’s next?

“Stock #2: A recent IPO – laser-focused on the under-digitized banking sector. Its automation tools have shrunk loan closing times by 40% and reduced servicing costs by more than 90%. That’s the kind of efficiency and cost-savings that get noticed. And not surprisingly, its customers include Bank of America, Regions Bank, TD Bank, and Barclays. Plus, this company is right in the middle of ‘hypergrowth’ right now – revenue growth has skyrocketed as the company is firing on all cylinders.”

That will make some folks drift their eyes straight to the credit platform Upstart Holdings (UPST), which Tom Gardner and the Fool have been publicly excited about all year, but these hints actually point instead to nCino (NCNO), which is more of a traditional software provider in the banking space. Ncino was born as a piece of software that was developed by a bank because they didn’t like what was available, kind of like how Tobi Lutke built Shopify to try to sell snowboards online before realizing that other people would need that software, too — so the project was born as part of Live Oak Bank and then spun out as a separate company about a decade ago (and Live Oak Bank (LOB) is public as well, incidentally, and is one of the biggest small business lenders in the US and still an nCino customer). The company has been growing its business for a while, but has only been public for about a year.

Those clues do all match up (they claim a 40% decrease in loan closing time as of today, and a 92% reduction in servicing costs, among other key metrics), and nCino basically offers what they call a “cloud banking” platform that can improve services for both bank employees and customers. You can peruse their investor presentation for more detail, but here’s how they describe themselves:

“Today, more than 1,200 financial institutions in countries around the world are using nCino’s Bank Operating System to solve business challenges, digitize processes and enhance the customer experience through speed and convenience. Designed with bankers in mind, nCino offers a single end-to-end digital banking platform that is flexible, scalable and designed to help reduce costs by improving employee efficiency and productivity across onboarding, loans and deposits, while enhancing the customer experience and ensuring regulatory compliance. nCino’s success has been well documented through numerous accolades including being named the No. 1 “Best Place to Work in Financial Technology” by American Banker; one of the Top Company Cultures by Entrepreneur Magazine; and earned positions on prominent industry rankings, such as the IDC FinTech Rankings, the Deloitte Technology Fast 500, and the Forbes Cloud 100 for two years running. nCino is passionate about its mission of transforming financial services through innovation, reputation and speed and continues to foster a strong culture that ensures long-term success for the company, its investors, partners and, most importantly, its customers.”

It’s probably tough to get in the door to convince a bank to change its systems, that’s a big and expensive shift, but they are growing nicely — and have gotten some large customers, so they have 36 customers who spend more than a million dollars a year on the platform, and 224 who spend at least $100,000. That’s critical, because those folks will also probably be sticky as they grow — so the typical cloud numbers we look at from these kinds of companies are impressive, including 155% retention and 59% annual growth in subscription revenues. And they see themselves as having huge growth potential still, since they have only about 4.5% of the potential market among commercial banks, and have not even really begun to sell into retail banks in a meaningful way.

So this is a niche software platform, and those have the potential to be great and defensible businesses… but it’s a huge niche, pretty much all the banks in the US and several other countries could be potential customers. There are plenty of competitors, including the companies like Jack Henry (JKHY) who’ve been selling software systems to banks for decades, so I don’t know how the competition shakes out, but often the relatively young and cloud-native companies have an advantage over firms like JKHY who have to support legacy systems (and the legacy providers with longtime client relationships, on the other hand, also have an advantage in that many banks, particularly smaller ones, are conservatively run and are reluctant to shake up their systems or make big changes).

Ncino is still fairly small, and they aren’t profitable, but they’re actually very close to profitability… it wouldn’t surprise me if they back off of any promises of future profit and instead focus on spending to continue their growth at a high rate, but since their IPO last summer they’ve been effectively at break-even on a cash basis most of the time (meaning, if you ignore employee stock compensation), so they’re not really burning cash.

Investors have not yet gotten manic about nCino, perhaps because it’s not really a nosebleed growth story — the stock is right around where it started trading in the $70s (though it was a wildly underpriced IPO, it priced at $31 when they went public last July, but has never traded below $50). It’s expensive, as you might imagine, with a $7 billion market cap and an expectation that they’ll have about $260 million in revenue this year (which means they’re at roughly 25X sales), but it might be worth a deeper look — companies that can offer a more efficient platform with strong retention, in highly regulated industries, sometimes have pretty impressive staying power. The reliance on large customers might be both a benefit and a curse if they have trouble selling big banks in any given quarter and miss their growth targets, but I like what I see at first glance.

I’d be inclined to think of this as being somewhat similar in theme to Avalara (AVLR), a SaaS company in a boring business that’s a little under the radar and maybe doesn’t really get investors fully lusted up (tax compliance, in Avalara’s case), but posting pretty strong and steady growth and high retention numbers, and gradually building up a large business whose customers will not want to leave. It also carries a similar valuation, roughly 25X sales for a company with ~30% growth and a business that operates more or less at break-even on a cash basis right now. I own AVLR and wouldn’t rush out to buy big into either of these companies at current prices, but they’re probably worth nibbling on for the patient, or considering on bad days.

And one more…

“Stock #3: A little-known software specialist that also recently when public; its specialty is digitizing and aggregating building information to improve efficiency in every part of the real estate cycle – from boosting build quality to reducing the costs of site surveys to virtual walkthroughs for potential renters. Its client list is a who’s who of big real estate players – Redfin, Remax, JLL, Keller Williams, Century 21, AirBnb, Hyatt, Nationwide, and more.

“It’s not Costar or Zillow…it’s far and away the dominant player in its space, with 100 times as much space under management as the rest of the market. This stock has seen 18x subscriber growth since 2018 — and perhaps best of all, management sees the total addressable market as $240 billion vs their current $105 million annual revenue. Of course almost no one ever ends up capturing the full value of a market, especially a market worth potentially $240 billion. It’s just too big! But if this company captured just 5% of that market, that’d be $12 billion – which would represent 113-fold revenue upside from here.”

This one is a somewhat sexier story than nCino, here they’re teasing the real estate digitization company Matterport (MTTR), which came public this year through a SPAC merger and is currently trading at about a 100% premium to where the SPAC deal valued the company — a fairly rare piece of exciting news from the SPAC space, following the washout so many SPACs have seen in the past six months.

What is “real estate digitization?” Here’s how the company describes itself:

“Matterport is the leading spatial data company digitizing the built world. By turning buildings and spaces into digital twins, Matterport unlocks unparalleled spatial data insights for companies and individuals to better design, build, promote, and manage their most valuable asset.”

And yes, those hints match perfectly — they do say they have 100X as much space “under management” as the rest of the industry, and it seems to me that they essentially invented the idea of thinking about and managing digital space in this way.

That $240 billion in addressable market is part of their marketing materials, and that’s wildly out of reach, of course, that’s 20 billion spaces in four billion buildings around the world. Matterport’s business model indicates that these spaces can generate $1 in “digital management” revenue per space, per month, but the number of “spaces” in the world is so vast that even at that low price it’s a crazy number.

Their somewhat more feasible illustration in their presentations is for 1% penetration, which would be at least many years away, and that would bring 200 million spaces under their management and generate $2.4 billion in annual revenue… though in addition to bringing on new customers and spaces, they also think they can upsell other digital services to those customers and maybe get to $5/space/month, bringing that 1% penetration to $12 billion in revenue. I think it’s probably more likely that they’ll be able to upsell a few million high-end spaces to higher cost services than that they’ll get 200 million spaces digitized and under management, but who knows what the future holds? Exponential change is hard for human beings to imagine.

They have posted great growth with many customers, and got a HUGE bonus from COVID because of the value of virtual walkthroughs and digital “due diligence” for real estate in a world in lockdown, so that’s a risk as we move forward — what will the growth rate be from here, and will it accelerate as more people know about the technology, or slow down as fewer people require it? There are plenty of question marks.

Right now, they have 5.6 million spaces under management (15 billion square feet of data captured), and 404,000 subscribers who are currently generating $118 million in revenue, only about half of which is recurring subscription revenue (the rest is mostly selling equipment and services)… so the valuation is certainly challenging, you have to imagine pretty dramatic long-term growth into a vast market if you’re paying ~40X revenues, but the total market could be gigantic. Over the past year they’ve done a good job of both bringing on new potential subscribers through their “freemium” strategy, particularly with their iPhone app, and in upselling their larger customers to spend more, with their net dollar expansion rate growing to 132% last quarter. Revenue growth is just barely at that 40% “hypergrowth” level the Fool emphasizes, but the growing and sticky subscriber base is valuable and we can probably justify that valuation if Matterport can continue to build and establish a dominant platform in real estate visualization and digitation.

I actually have a small exposure to Matterport, I put on a 2024 call option position last week because I like the company and its potential to become the standard for realtors and builders and landlords, digitizing spaces and making leasing and renovation much easier and more efficient… but I did use options because I’m not at all sure they can hold anywhere near this valuation if there’s a big sentiment shift in the markets, so I’m limiting my cash at risk. I guess I’m a wishy-washy bull on MTTR… I love the value of the data they’re building, and how it might be used in the future, and I am very impressed with their vision to take this from a software or hardware platform, just providing a scanned 3D version of space, and turn it into a service that they can manage.

I think it’s too early to say this is proven to work, and there are plenty of competitors who might commoditize the business at least when it comes to capturing the 3D data and creating digital twins, but it is possible that the value they get from having the biggest database means their products improve dramatically versus the competition, which leads to the possibility that they could end up with a natural monopoly in this space. It’s way too early to bet big on that, but I like what they’re doing so far.

And that’s all I’ve got on this one — three SaaS stocks for your consideration, teased by the Foolies as still having “hypergrowth” potential, and they’re all both expensive and interesting. Have a favorite in this bunch? See better SaaS opportunities elsewhere that you’d like to share with the class? Just let us know with a comment below… and thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of and/or call options on Shopify, Avalara and Matterport. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.