🗞 The 7 Fastest Growing (and Profitable) Software Companies

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 📈 The 7 Fastest Growing (and Profitable) Software Companies

• 💰️ Activist Investors Were Right About Salesforce

Let’s dive in!

Featured Story #1

The 7 Fastest Growing (and Profitable) Software Companies

If I gave you a list of all the fastest growing software companies, you’d likely notice a recurring theme. Most of them are not profitable.

When you’re an early-stage business (especially a software business) and you’re in growth mode, it can be enticing to spend $1.10 to earn $1.00 in annual revenue. After all, you’re a sticky software business and those customers will probably be around for a while, so it should be worth it in the long run (aka lifetime value), right?

Well… sometimes.

Markets are competitive. Young upstarts may come along and try to steal your market share just like you did to the incumbents before you. And then, before you know it, that lifetime value might not be as high as initially anticipated.

But the few exceptional companies that can marry above-average growth with consistent profitability, those can drive substantial returns for investors.

Here are the 7 fastest growing software companies in America that are also profitable:

1. Crowdstrike

Crowdstrike is a cybersecurity company that provides cloud-based protection across endpoints and cloud workloads.

• 5yr Revenue CAGR: 51.8%

• LTM Net Profit Margin: 3.4%

2. Datadog

Datadog is a monitoring and security analytics company for developers and IT operations teams.

• 5yr Revenue CAGR: 46.2%

• LTM Net Profit Margin: 7.6%

3. AppLovin

AppLovin provides a matchmaking platform between mobile app developers and advertisers.

• 5yr Revenue CAGR: 36%

• LTM Net Profit Margin: 26.9%

4. Smartsheet

Smartsheet provides an enterprise platform that helps to plan, capture, manage, automate, and report on work for organizations.

• 5yr Revenue CAGR: 32.9%

• LTM Net Profit Margin: -0.8% (turned profitable last 2 quarters)

5. Palantir Technologies

Palantir provides data fusion platforms that help facilitate machine-assisted and human-driven data analysis.

• 5yr Revenue CAGR: 30.6%

• LTM Net Profit Margin: 18%

6. DoubleVerify

DoubleVerify provides tools to advertisers and publishers that can detect fraud, monitor viewability, and ensure brand safety.

• 5yr Revenue CAGR: 29.6%

• LTM Net Profit Margin: 10.3%

7. ServiceNow

ServiceNow is a software company that provides a platform for automating multiple management workflows in enterprise businesses.

• 5yr Revenue CAGR: 25.8%

• LTM Net Profit Margin: 12.8%

Featured Story #2

Activist Investors Were Right About Salesforce

Let’s play a game. Can you guess when the activist investors showed up at Salesforce?

If you guessed 2022/2023, you would be correct.

Between October of 2022 and March of 2023, several high profile activist investment firms took stakes in Salesforce.

• Elliott Management ($71B AUM)

• Third Point LLC ($11.5B AUM)

• ValueAct Capital ($9.3B AUM)

• Starboard Value ($8.3B AUM)

• Inclusive Capital ($1.8B AUM)

And each one gave some sort of a boiler plate statement that looked a bit like this:

“We have been in close, productive dialogue with Salesforce… We believe they are a true leader in the software industry… But their margins don’t yet fully reflect that… With our help, Salesforce can take the necessary steps to earn back investor trust.”  

Translation: Salesforce spends too much money.

Here’s what followed:

In early 2023, Salesforce announced a broad financial restructuring plan that included a ~10% workforce reduction and exiting some of its expensive real estate assets.

So far, that financial restructuring appears to be working.

Salesforce reported its 2024 third quarter earnings on Wednesday and delivered record trailing 12-month profitability for the 7th straight quarter.

Despite significantly reducing its cost structure, Salesforce has still delivered 23% total revenue growth over the last two years.

The company’s CEO Marc Benioff doesn’t seem to think that’ll be slowing down any time soon either. While discussing the company’s recent focus on developing and deploying AI agents for customers, Marc Benioff stated “this is the most excited I've ever been about the software industry.”

Salesforce stock closed up 9% this week.

Meme of the week

Spotify Wrapped

It’s Spotify Wrapped season.

This week the world’s largest audio streaming platform pushed their customized annual listening recap to their more than 600 million monthly active users.

And of course, the memes started rolling in.

Here’s the FinChat spin on things. This is your friendly reminder that sometimes less is more, especially in investing.

Do your research, buy right, and sit tight.