10 Small Cap SaaS Stocks Hedge Funds Are Piling Into

Published on February 23, 2023 at 10:04 am by Ramish Cheema in Hedge Funds, News

In this piece, we will take a look at ten small cap SaaS stocks that hedge funds are piling into. For more SaaS stocks, head on over to 5 Small Cap SaaS Stocks Hedge Funds Are Piling Into.

While traditional sectors such as leisure, travel, and hospitality were dealt massive blows by the coronavirus pandemic, one sector that thrived was software as a service, or SaaS. This industry is made of firms that provide a software subscription to customers – whether corporate or retail – and host the software and the associated data on either their own servers or third party equipment. This lends the end user a variety of benefits as services can be globally accessed without the need to invest in hosting hardware courtesy of the Internet.

The coronavirus increased SaaS spending since companies had to make their employees work from home, and lockdowns increased the demand for digital products and services. From a business operations standpoint, firms had to migrate to virtual enterprise resource planning (ERP) systems as stay at home orders necessitated the need to access planning systems remotely. Two key reasons that fueled this migration were the low up front costs associated with SaaS and the benefits of remote access. The growing demand transformed software providers as well, with research from Deloitte revealing that firms such as Kronos, InVison, and Adobe Inc. (NASDAQ:ADBE) transforming their business operations to meet the changing trends. This enabled Adobe to add a whopping $5 billion in recurring revenues to its top line, while Kronos won big through 90% cloud bookings, 95% customer retention, and a 30% subscription growth rate.

Moving forward to 2023, consumer spending in cloud computing has slowed down. The strongest indicator of this is the earnings reports of semiconductor designers and sellers such as NVIDIA Corporation (NASDAQ:NVDA). Nvidia posted its earnings report for the fourth quarter of the fiscal year 2023 on February 22, 2023, and in it, the firm outlined that its Data Center division’s revenues had dropped by 6% over the previous quarter. This drop confirmed analyst reports that had surfaced before the earnings release. For instance, MoffettNathanson’s Sterling Auty shared in early February that growth in the industry is slowing down and will continue to do so at least until the end of this quarter.

The analyst’s opinion was mirrored by spending at firms that use the cloud for their products and services, with Snap Inc. (NYSE:SNAP)’s chief financial officer Mr. Derek Anderson sharing at the firm’s annual investor day in February that it will cut down its payments to major cloud providers such as Alphabet Inc. (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN). The decision came as part of an inflation driven cost cutting exercise through which Snap brought down its infrastructure cost per daily active user to $2.31 from a previous $2.78. Additionally, a rather interesting consequence of the need of efficiency in the industry seems to be taking place at Google, where the firm has asked its Cloud division employees to share their desks and schedule their working days on alternative time periods. According to CNBC, this strategy is designed to allow Google to continue investing in Cloud, and the publication reveals that:

“Most Googlers will now share a desk with one other Googler,” the internal document states, noting that they expect employees to come in on alternate days so they’re not at the same desk on the same day. “Through the matching process, they will agree on a basic desk setup and establish norms with their desk partner and teams to ensure a positive experience in the new shared environment.”

Yet, despite the current slowdown, a study from Gartner conducted in October 2022 said that public Cloud end-user spending will grow from $490.3 billion in 2022 to $591.8 billion this year, with Cloud Application Services, or SaaS, growing from $167 billion to $195 billion.

In terms of monetary value, the SaaS sector is worth hundreds of billions of dollars, with multiple research reports diving into the details. One such report comes from Insight Partners, which outlines that the industry was worth $167 billion in 2022 and it will grow at a compounded annual growth rate (CAGR) of 18.5% from then until 2028 to be worth an estimated $463 billion by the end of the forecast period. The firm outlines that North America is the world’s largest market for SaaS, with Europe coming in at a second place. It also states that telecommunications, healthcare, financial services, and media are the largest users of cloud computing. Another research report, this time from Fortune Business Insights, has an even brighter outlook for the industry, as it claims that from an estimated value of $215 billion in 2021, it will grow at a CAGR of 19.7% to sit at an estimated $883 billion by 2029-end.

Out of our list of small cap companies that are hedge fund favorites, the top performers are Everbridge, Inc. (NASDAQ:EVBG), Yext, Inc. (NYSE:YEXT), and Momentive Global Inc. (NASDAQ:MNTV).

Our Methodology

We started our research for this piece by listing down all companies that have a market capitalization between $250 million and $2 billion and earn most of their revenue from SaaS. Then, the top ten favorites among hedge funds were chosen, using Insider Monkey’s fourth quarter of 2022 survey of 943 funds. For more SaaS companies, you can take a look at 10 Profitable SaaS Companies for 2023.

Small Cap SaaS Stocks Hedge Funds Are Piling Into

10. Sumo Logic, Inc. (NASDAQ:SUMO)

Number of Hedge Fund Shareholders In Q4 2022: 19

Sumo Logic, Inc. (NASDAQ:SUMO) is a software company that provides a platform to enable firms to manage their cloud applications. This includes monitoring application reliability, monitoring threats, and automating responses. The firm is based in Redwood City, California.

While Sumo Logic, Inc. (NASDAQ:SUMO) is quite popular among hedge funds, retail investors will soon miss out on the chance to buy its shares as the firm agreed in February 2023 to go private. 19 of the 943 hedge funds part of Insider Monkey’s Q4 2022 study had bought its shares.

Sumo Logic, Inc. (NASDAQ:SUMO)’s largest investor is Israel Englander’s Millennium Management which owns 2.1 million shares that are worth $17 million.

Yext, Inc. (NYSE:YEXT), Everbridge, Inc. (NASDAQ:EVBG), and Momentive Global Inc. (NASDAQ:MNTV) join Sumo Logic, Inc. (NASDAQ:SUMO) in the list of favorite hedge fund small cap SaaS stocks.

9. Fastly, Inc. (NYSE:FSLY)

Number of Hedge Fund Shareholders In Q4 2022: 20

Fastly, Inc. (NYSE:FSLY) offers customers a virtual platform for content development, application, security, and other uses. It is headquartered in San Francisco, California.

After it posted bumper FY 2022 results in February 2023, Fastly, Inc. (NYSE:FSLY)’s share price target was upgraded by Citi to $8 from $7, even as it maintained that the firm needs to sustain its performance. As of last year’s December quarter, 20 of the 943 hedge funds part of Insider Monkey’s research had held a stake in the company.

Steven Cohen’s Point72 Asset Management is Fastly, Inc. (NYSE:FSLY)’s largest investor. It owns 5.2 million shares that are worth $42 million.

8. 2U, Inc. (NASDAQ:TWOU)

Number of Hedge Fund Shareholders In Q4 2022: 20

2U, Inc. (NASDAQ:TWOU) is a digital education company that provides virtual degree and training programs in collaboration with leading universities such as MIT and Harvard. The firm is based in Lanham, Maryland.

2U, Inc. (NASDAQ:TWOU)’s CEO Mr. Chip Paucek defended his company against criticism by a lawmaker in February 2023, outlining that his platform is necessary for universities to broaden their reach. Insider Monkey profiled 943 hedge fund portfolios for 2022’s fourth quarter to determine that 20 had bought 2U, Inc. (NASDAQ:TWOU)’s shares.

2U, Inc. (NASDAQ:TWOU)’s largest investor in our database is Catherine D. Wood’s ARK Investment Management which owns 9.1 million shares that are worth $57 million.

7. Q2 Holdings, Inc. (NYSE:QTWO)

Number of Hedge Fund Shareholders In Q4 2022: 21

Q2 Holdings, Inc. (NYSE:QTWO) is a SaaS company that focuses on the financial industry. The firm offers other financial institutions a platform that lets them set up digital banking capabilities, enable remote check deposits, run security analyses, and conduct other tasks. The firm is headquartered in Austin, Texas.

Q2 Holdings, Inc. (NYSE:QTWO) expanded its global footprint in 2023 as it announced that it has partnered up with an Australian bank to provide deposit and loan processes. 21 of the 943 hedge funds part of Insider Monkey’s Q4 2022 survey had held a stake in the firm.

Q2 Holdings, Inc. (NYSE:QTWO)’s largest hedge fund investor in our database is Brett Barakett’s Tremblant Capital which owns 1.7 million shares that are worth $48 million.

6. Amplitude, Inc. (NASDAQ:AMPL)

Number of Hedge Fund Shareholders In Q4 2022: 21

Amplitude, Inc. (NASDAQ:AMPL) is a customer analytics firm with cloud software letting firms run marketing campaigns, generate artificial intelligence data alerts, and study the impact of product changes. The firm was set up in 2011 and is headquartered in San Francisco, California.

In its latest earnings conference call, Amplitude, Inc. (NASDAQ:AMPL)’s CEO shared that while his firm is quite vulnerable to the ongoing downturn in the digital industry, it is also better equipped to ensure operational stability since it did not overhire and operates with costs in mind. Insider Monkey dug through 943 hedge fund holdings for last year’s fourth quarter and found out that 21 had bought the firm’s shares.

Out of these, Gil Simon’s SoMa Equity Partners is Amplitude, Inc. (NASDAQ:AMPL)’s largest shareholder. It owns 3.5 million shares that are worth $42 million.

Everbridge, Inc. (NASDAQ:EVBG), Yext, Inc. (NYSE:YEXT), Amplitude, Inc. (NASDAQ:AMPL), and Momentive Global Inc. (NASDAQ:MNTV) are some small cap SaaS stocks on hedge funds’ radar.

Click to continue reading and see 5 Small Cap SaaS Stocks Hedge Funds Are Piling Into.

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