Why Wise, Kainos and Sage Group are overlooked SaaS stocks

The cloud sector is ripe for expansion as companies continue to invest in improving IT infrastructure. Wise, Kainos and Sage Group are three London-listed key players that are well positioned to benefit from this growing theme.

London-listed Wise [WISE.L], Kainos [KNOS.L] and Sage Group [SGE.L] are alternative plays on the software-as-a-service (SaaS) theme to the usual US-listed heavyweights.

Economic uncertainty hasn’t been holding back the cloud sector recently. Amazon [AMZN], Alphabet [GOOGL] and Microsoft [MSFT] reported year-over-year revenue growth in the second quarter. Yet there are plenty of smaller companies that don’t get as much attention.

“We believe that while consumer-focused software companies have attracted a disproportionate share of the press’s time and attention, the large number of early-stage opportunities in enterprise software seems to be more fertile ground for potential growth,” wrote ARK Invest analysts in a white paper on SaaS titled ‘Could 2020-2030 be the Golden Age?’.

“While there’s only room for one Amazon, Google or Facebook in their respective markets, there is room for hundreds if not thousands of unique software companies solving for the ever-growing needs of IT, sales, HR, finance, and R&D of modern enterprises.”

Wise’ API for financial platforms

Wise, formerly TransferWise, doesn’t offer SaaS products or services directly. The money and currency transfer company has, however, built an application programming interface (API) that banks can integrate into cloud platforms. Clients include Monzo and Estonian bank LHV [LHV1T.TL].

Business customers can also connect their accounts with accounting software such as Xero [XRO.AX].

Back at the beginning of the year, Citi advised its clients to dump the stock, saying that “excessive long-term growth expectations” had already been priced in, according to a client note seen by City AM. The stock has continued to fall since then and is down 36.1% year-to-date. It has, though, gained 69.6% since bottoming at a 52-week low of 285p on 30 June, closing at 483.3p on 24 August.

Kainos strengthens Workday partnership

In July, Belfast-based software company Kainos announced it had been chosen by Workday [WDAY] as a ‘phase 1 prime status’ partner in the US. In layman’s terms, this means it can now bid for rollouts of Workday software as opposed to previously only being allowed to bid for extensions or upgrades after initial deployment.

Analysts at Canaccord Genuity believe ‘phase 1 prime status’ “should be accretive to the growth opportunity,” according to a client note seen by Sharecast at the end of July. It’ll also enhance Kainos’ mid-to-long-term prospects in the “fast-growing” US SaaS industry.

The Canadian bank reiterated a ‘buy’ rating and a target of 1,350p for the Kainos share price, which implies a 0.8% upside from the 24 August closing price of 1,361p. The stock is down 36.1% year-to-date, though it has gained 11.6% over the past month.

Sage offers resilient revenue growth

The Canaccord Genuity analysts also upgraded accounting software provider Sage in August from hold to buy, reported Sharecast. It increased its target for the Sage share price from 760p to 875p, implying an upside of 17.5% from the 24 August closing price of 721.20p. The stock is down 13.4% year-to-date but up 2.9% over the past month.

Sage’s customers are mainly small and medium-sized businesses and inflation will impact SMEs much more than it will bigger firms. Investors have every right to be concerned, the analysts wrote in their note, but they can take positives from the fact Sage managed to grow its recurring revenue by low-to-mid single-digits during the downturns of 2008–2009 and 2020.

“We are unsure of the severity and duration of the coming slowdown, but assuming a sharp recession is avoided then we see several factors shielding [fiscal 2023] consensus,” they added.

Sage announced earlier this month that it had agreed to acquire Seattle startup Lockflow, which offers a cloud technology for automating accounting software. The financial terms haven’t been disclosed, but the deal is expected to be completed by the end of September.