What makes a stock SaaS?
Posted: Sat Apr 24, 2021 9:23 pm
Everyone of course knows what the acronym "SaaS" stands for -- it is "software as a service" -- but it is surprisingly harder to define than one might think. Consider three examples:
1. A traditional business software platform like Microsoft Word, Excel, or Photoshop. Here, it seems clear that the product fits the mold of "software as a service" because it involves a subscription to be a piece of software and the software provides access to a software-like function, that is, the software is the service.
2. A telehealth company that provides an app for access to a range of services accessible through the application. Is this software as a service? (My own view is that I think it could be, but often it in fact is not).
3. A software company that provides e.g., communications services like Zoom or Skype. These are close calls like the telehealth companies, because they enable a functionality but it is a functionality that was achieved without the need for software in the past. (Theoretically word processing was too, however).
These seeming definitional questions are more than theoretical, because it seems like what makes an SaaS company truly special is its capacity to develop an almost impregnable "moat" to use Warren Buffett's term. There needs to be a special sauce to the software offering that makes it uniquely difficult to either develop the software package (to prevent competitors from entering) or for users to switch to a different software system.
Viewed in this light, cybersecurity offerings like CrowdStrike and Zoom may be less attractive or may not even necessarily fall within the core definition of SaaS companies.
1. A traditional business software platform like Microsoft Word, Excel, or Photoshop. Here, it seems clear that the product fits the mold of "software as a service" because it involves a subscription to be a piece of software and the software provides access to a software-like function, that is, the software is the service.
2. A telehealth company that provides an app for access to a range of services accessible through the application. Is this software as a service? (My own view is that I think it could be, but often it in fact is not).
3. A software company that provides e.g., communications services like Zoom or Skype. These are close calls like the telehealth companies, because they enable a functionality but it is a functionality that was achieved without the need for software in the past. (Theoretically word processing was too, however).
These seeming definitional questions are more than theoretical, because it seems like what makes an SaaS company truly special is its capacity to develop an almost impregnable "moat" to use Warren Buffett's term. There needs to be a special sauce to the software offering that makes it uniquely difficult to either develop the software package (to prevent competitors from entering) or for users to switch to a different software system.
Viewed in this light, cybersecurity offerings like CrowdStrike and Zoom may be less attractive or may not even necessarily fall within the core definition of SaaS companies.