DirecTV Update and the U.S. Enterprise SaaS sector

Looks like AT&T decided to acquire DirecTV after all. I’ve sold my shares and am currently looking at opportunities in the U.S. enterprise SaaS sector. I think there’s tremendous potential here for the astute investor to pick the right long term winners. Unlike the great social networks, the enterprise SaaS space is less well known and isn’t suffering from being in a crowded market as many B2C plays are. Businesses that exhibit highly scalable, recurring revenue business models with large target markets and limited competition are always high up on my radar as potential investments. Many SaaS companies have these characteristics.

In general, what might you want to be looking for in a good enterprise software company?

In addition to the above, I think some of these things might be a good place to start.
1. A great product that customers love, which usually leads to referrals. The product being mission-critical is also a huge plus, and helps with maintaining pricing power.
2. A large and diverse customer base that represents many industries.
3. Relatively low churn; this is key as churn is a key business driver in any SaaS business.
4. A sizable market opportunity.
5. A great company culture. I think this is more important than what most people give credit for. If you have a shitty company culture, you wont attract the best engineers, which means your product will likely suffer. In such a human capital intensive business model, company culture is critical…

Many “old school” value investors might automatically write-off hot SaaS companies as potential investments because of an unfamiliarity with the technology side of the business, and valuation concerns. I don’t think there’s a SaaS bubble at all, and that many great SaaS businesses add a ton of value to their customers, which will only grow over time. Some of the top VCs in Silicon Valley with great long-term track records are piling on tons of money into the enterprise software space, and as more of these startups go public the key to making money will be to investing in the right ones.

2 Comments

  1. Hi i recommend you DSG.to Descartes, they provide SAAS software for logistics market, they are the largest player in a very fragmented market, they are consolidating the market, huge synergies in the R&D ( they effectively paid around 5x FCF after synergies during the last 8 years…) , management is very good since they took control the company in 2006 they have grown CAGR 20%+ during the last 8 years, 90% revenues are recurring. FCF this year will be 50M and next year should be around 60M-65M it is trading at 17x FCF if you exclude cash en B/S. They have grown using very little debt and they rarely issue new shares… ( they last time was when the listed in USA), when they deploy this 150M in acquisition they can generate 25m additional FCF. Very resilient biz ( check out the numbers and share price in 2008 and 2011…)

    Reply

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