You Can Still Make Big Money in Software... If You Know Where to Look

Guidewire Software (GWRE) is the one that got away.

The market loves this software giant. While growth has slowed slightly in the last couple of years, Guidewire's revenues steadily compounded at a rate of 20% per year for more than five years.

It's no wonder the stock is up 750% since it first went public... a return that trounces the overall market (up "only" 190%, including dividends).

Back then, I wrote for our company's large-cap service. I didn't have an outlet for high-growth, tiny companies. So I wish this were still a small company just starting out today. Now the big gains are over, and the stock is fairly expensive.

Finding stocks like Guidewire – before they skyrocket – has become an obsession for me. Fortunately, we have other opportunities. You just have to know where to look...

You see, Guidewire is a special kind of software company. The market loves this sector right now, and it has bid up prices accordingly. Investors can still make life-changing gains in stocks like these... but you have to find the "hidden" names – the ones the market hasn't caught on to yet.

Today, I'll show you why this is one of the market's hottest sectors... and why it's so important to buy the right stocks in this groundbreaking field.

Guidewire's co-founder Marcus Ryu once called his business "one of the largest vertical software-as-a-service ("SaaS") companies in the history of software."

That's probably an overstatement. But any kind of SaaS business is enough to make the market fall in love...

Ten years ago, most software companies sold "perpetual licenses." This means customers had to buy both the software and the hardware on which to run it. Customers also paid a service fee to have the software installed... then paid a support fee every year to have access to a customer help desk and to receive the latest bug fixes and software upgrades.

Wall Street used to love the perpetual license model because companies would earn a large chunk of revenue when they sell the initial license. The downside was that the sales could be lumpy. (Guidewire, when it first went public, sold "perpetual" licenses.)

But times have changed...

Wall Street loves something else, now – the SaaS model. Instead of buying a license for the software, SaaS customers essentially rent the software. A company loads its software product on servers that it maintains, and the customer uses the software via the Internet.

Customers like this arrangement because they don't need to buy or service their own hardware. Software companies like it because SaaS revenue is less lumpy and more predictable...

And the stock market loves it because the SaaS model is incredibly "sticky," meaning customers tend to renew year after year. So as long as the company is relatively successful at booking new customers, revenues naturally pile up over years and decades.

The market loves the SaaS sector now. In my Stansberry Venture Value newsletter, we discovered something amazing about this corner of the market...

We reviewed more than 60 SaaS initial public offerings ("IPOs") that took place since customer-relationship software company Salesforce (CRM) went public in 2004. (Salesforce is credited with popularizing the SaaS model.)

The results were staggering...

On average, SaaS companies returned more than 419% in the years following their IPOs. That works out to an annualized return of 56% per year.

However, those numbers assume you could have gotten in right at the IPO price. Most folks didn't get in that early... So we reran the analysis assuming you bought shares in these 60-plus businesses 30 days after their IPOs.

It turns out, even if you missed the excitement of the initial "market pop," you still would have earned more than 290% – or 46% annualized gains.

I want to reiterate... this is both the duds and the darlings. And this study's eye-popping returns don't even count Guidewire's 750% return (the company isn't a pure SaaS business, so we didn't include it in our analysis).

But the glory days of easy money are over. You can't buy both the duds and the darlings today and expect to make these kinds of profits...

SaaS companies have become expensive. Most of them have rich price-to-sales multiples of up to 30 times revenues, versus two to 10 times revenues for companies that still operate under the perpetual model.

That's why we've been looking for the "hidden" SaaS companies... the ones that the market hasn't spotted yet.

These are fantastic businesses. And you can still make triple-digit gains in SaaS stocks – while no one else is paying attention – if you make the right bets today.

Good investing,

Bryan Beach

Editor's note: Every year, more and more SaaS companies are popping up, relatively unnoticed... And the best ones could still grow 10-fold or more. Bryan recently uncovered three such "hidden" opportunities that could soar as much as thousands of percent over the long term. Get the full story here.

Further Reading

"Until just last month, New York was working hard to extract a huge fine from us," Bryan writes. And thanks to this ridiculous loophole, the chances are good that you could find yourself in the same position... Get the full story here: How I Found Myself in the Government's 'Crosshairs.'

"When evaluating your investment performance, it's not all about the numbers," Bryan says. It can be hard to know whether to dump a losing stock or hold on despite turbulence. But a company's share price isn't the only thing to consider when reviewing your portfolio... Learn more here.

Market Notes
CINEMA PROFITS SHRINK AMID ONLINE COMPETITION

Today’s chart shows the struggles of an aging business model…

Longtime readers know we follow big secular trends, such as the rise of video streaming. Companies like Netflix (NFLX) have made it easy and affordable to watch movies when you want, where you want… And Disney (DIS) and other media giants are following suit. That competition puts pressure on old-school movie theaters. Take a look at today’s company…

IMAX (IMAX) has more than 1,500 high-end theaters in 81 countries and territories. It promises to “connect with audiences in extraordinary ways” with huge screens and 3D effects… but more and more folks are happy to just watch movies on their phones or TVs. With tickets regularly costing $20 per person, IMAX has kept box-office receipts high, hitting a record $1.035 billion last year. But its growth has stagnated… Profits have fallen more than 50% since early 2016, to just $30 million in the past 12 months.

Over the past three years, IMAX shares have been cut in half… and they recently hit multiyear lows. With so many more ways to watch movies from home, pricey movie theaters face an uphill battle…