Software as a service (SaaS) solutions are amongst the fastest-growing in the wider IT industry. They typically work on a subscription basis (or pay-as-you-go), enabling recurring revenue. SaaS businesses also house their services on the cloud, allowing customers – including other businesses – to access them easily and affordably from almost anywhere in the world. In this industry report, our team at Bure Valley Group examines the state and direction of the industry in 2022. Below, you’ll find information on key players, new entrants, opportunities and risks for investors to consider. We hope this content is useful to you.
SaaS: market overview
In 2015, the global SaaS market stood at $31.4bn (US). Five years later, it had exploded to $120bn. Today, in 2022, it is estimated at $176bn and is expected to grow a further $25bn next year. During the 2020-28 period, compound annual growth rate (CAGR) is projected at 27.5% – huge growth rates which are bound to interest any keen investor.
The overall market can be segmented in multiple ways. Firstly, it can be segmented by application – such as Customer Relationship Management (CRM) systems and Enterprise Resource Planning (ERP). Secondly, there is the deployment model, which broadly emcompasses three types: public cloud, private cloud and hybrid. Then there is the enterprise size, such as SME or large established business. Finally, the end user – such as healthcare, manufacturing and retail.
When it comes to diversifying a SaaS portfolio, these segments are helpful for the investor to bear in mind when spreading their risk across multiple areas.
Key players in SaaS
Countries which feature significant SaaS companies contributing to the economy include:Australia; Brazil; China; France; Germany; India; Indonesia; Japan; Russia; South Korea; UK; USA. The latter, of course, features the largest and most prominent, including:
- Amazon (AWS)
According to Gartner, end-user spending by global public cloud services is expected to retain dominance in 2022 and in the years ahead (although growth is starting to slow). Cloud business processing services (BPaaS), for instance, has risen from $46bn in 2020 to $55.5bn in 2022. IaaS (infrastructure as a service), moreover, has doubled in the same timeframe – from $64bn to $121.6bn. The largest SaaS companies, of course, partly depend on definitions. Yet most analysts accept the following as the world’s major players to watch:
- Salesforce ($208.91 billion market cap)
- Microsoft ($290)
- Amazon Web Services ($600-900bn)
- Cisco ($51.58bn)
Latest trends & COVID-19 impact
In 2020, the world was hit by the COVID-19 pandemic – sending nations into lockdown and forcing millions to rely on cloud services as they worked from home. This, undoubtedly, helped drive up demand for SaaS services. In 2022, a slight drop has transpired as more organisations move workers back into the office. However, the rising adoption of cloud services since 2020 has led to greater penetration – and reliance – in more industries. Advancements in big data diagnostics techniques in healthcare, for instance, has been a significant driver in demand for SaaS in recent years to improve database management.
Productivity and security have also been improved in multiple spheres with the increasing adoption of artificial intelligence (AI). These include email and data security, to help protect from cyberattacks (which also rose in number during lockdown). Mobile and internet usage has also continued to grow in many parts of the world, also benefiting the SaaS market.
Of course, the future remains uncertain with COVID-19. Will a new variant bring a return to lockdown in the UK and other countries? If so, this is likely to drive up further demand for SaaS solutions as organisations equip staff for remote working. However, an increasing return to “normal life” (pre-pandemic) could also bring favourable conditions for SaaS. End-use industries are increasingly adopting emerging technologies such as containerisation, virtualisation and edge computing – driving further SaaS demand. Growth in other, related industries such as big data, cloud computing and AI is also likely to continue to fuel this demand even further.
Risks & restraining factors
Two important impediments could pose themselves to the SaaS sector in the coming years. Firstly, valuations are currently standing at an historic high for many tech companies. Amazon recently saw its stock price fall considerably, from 3,386 at the start of April 2022 to 2,518 at the time of writing. This has partly been driven by rising interest rates in many Western countries, which typically drives more “cautious” investors towards “saver” fixed-rate securities (i.e. US Treasuries, which offer a higher return than before). Investors should be mindful, therefore, of the wider economic context in which publicly-traded SaaS companies are operating.
Secondly, cyberattacks pose both an opportunity and threat to the sector. On the one hand, increasing online attacks helps to drive demand for digital solutions (e.g. from cloud/Saas companies) which can counter them. Alternatively, events such as data loss, application vulnerabilities and other unforeseen emergencies could hamper the growth of many SaaS companies and their customers. Events like these can also lead to political calls for reform – e.g. regulatory changes on personal data, which could also inhibit SaaS companies from growing as quickly as they otherwise might.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
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