3 Software Stocks Share This 1 Key to Success

Would you buy a car without driving it first? I’m sure it happens, but I can’t imagine anyone who would do so by choice. Buying software is no different. Before they buy, most users want to experience the application to get a feel of what it can do and how […]

Would you buy a car without driving it first? I’m sure it happens, but I can’t imagine anyone who would do so by choice. Buying software is no different. Before they buy, most users want to experience the application to get a feel of what it can do and how easy it is to use. Software companies recognize this issue and often offer free trials to lure potential customers, but three software-as-a-service specialists have taken this concept even further.

Let’s take a look at how this trio has mastered the art of capturing and keeping new customers and what that’s meant for the growth of these companies and their stocks.

1. Atlassian: Casting a wide net to capture new customers

Atlassian (NASDAQ: TEAM) has a suite of five core software applications that support its mission to “unleash the power of every team.” These applications were originally built to cater to software development teams, but have expanded their capabilities to apply to project teams of any kind.

In March, to help attract customers during the coronavirus pandemic, management opened up its flagship Jira and Confluence cloud-based tools for free trials, making all of the company’s cloud applications available to small teams for free. This broad range of free applications offers numerous on-ramps to Atlassian’s ecosystem and has been wildly successful in capturing and keeping new customers.

Old style skeleton key hanging from chain with the word success scrawled on a scrap of paper attached to the chain.

Image source: Getty Images.

In the second quarter, the company reported over 174,000 paying customers, up 13% from a year ago. A low double-digit customer growth number may seem underwhelming, but there are other factors at play that turned it into a 29% year-over-year top-line gain. Having an easy-to-use collaborative team-based tool attracts new users, but it also makes it attractive for customers to expand their usage over time. The graphic below from the company’s 2019 investor presentation shows the multiplicative power of this land-and-expand model.

Line graph showing annual cohorts of customers increasing spending over time. As more cohorts are added each year with more spend the rate of overall bookings increases.

Image source: Atlassian 2019 investor day presentation.

Each color bar is a “cohort,” or group of customers that joined in the same year. Each one of these cohorts has expanded their spending, which creates an accelerating effect for the overall bookings (an indicator of overall contract value). This natural adoption rate enables the company to have a resource-efficient customer acquisition model which allows it to spend almost 2.5 times more money on research and development (R&D) than on sales and marketing. The additional R&D investments improve the ecosystem and its ability to land and expand with new customers.

2. Twilio: Catering to software developers

Twilio‘s (NYSE: TWLO) CEO and co-founder Jeff Lawson is a software developer. So it’s no surprise that its growth strategy for its communications platform has been centered on reaching, educating, and empowering software developers. Its free trial subscription has all the capabilities of the paid version, providing developers full access to customer support and product documentation. With all of the platform’s capability at their fingertips, developers can create fully functioning prototypes in a matter of hours, giving the business clear insights into what’s possible. The company also provides developer community blogs and an educational online game called TwilioQuest that teaches developers how to use the platform in a fun and engaging way.

This strategy has been highly successful in driving growth. Last quarter, new customers grew 24% year over year, but like Atlassian, overall revenue grew even faster, at a 46% year-over-year rate driven by solid net dollar retention of 132%. Twilio also prioritizes R&D efforts and spends a significant 58% of revenue to continue to maintain its technical leadership position and make its platform even more useful for developers.

3. Shopify: Making entrepreneurship easier

Shopify‘s (NYSE: SHOP) mission to “make commerce better for everyone” starts with a merchant-centric approach. Since it was founded in 2006, the platform to help small businesses start and run e-commerce stores has endeavored to make the on-ramp for new e-commerce entrepreneurs easier to navigate. 

New customers start with a free trial and can move to a paid subscription for as little as $9 per month. This low-cost subscription plan enables sellers to set up “buy buttons” on existing websites and accept credit card payments, potentially providing hobby sellers all they may need to have a successful online business. But for those with loftier goals, Shopify has a set of higher-functioning subscription plans up to its premier feature-rich Shopify Plus service for high-volume sellers starting at $2,000 per month. In response to the coronavirus, management extended its free trial period to 90 days, which has enabled new customers to get some experience under their belts before having to pay subscription fees in these challenging times.

Shopify’s ever-improving and easy-to-onboard platform and wide-ranging subscription offerings have proven to be an incredible recipe for growth. The platform now serves over 1 million merchants, who made a record $30 billion in product sales last quarter using its software. The company has become a $2 billion annual revenue run rate powerhouse on the back of an amazing five-year run of 46% compound annual growth rate in its monthly recurring revenue.

The bottom line for investors

These three stocks have been marvelous investments for shareholders, trouncing the market over the last three years by huge margins.

SHOP Chart

SHOP data by YCharts

But this trio isn’t done. Atlassian acquired two software businesses in the last year to expand to its ecosystem of applications giving it more ways to capture new customers. Twilio has earned HIPAA certifications for its key products enabling it to manage sensitive healthcare data and expand its use cases for developers. Shopify continues to innovate on its platform making it even more attractive for small businesses to sign on.

Look for these winners to keep on winning long into the future, giving shareholders the opportunity to continue to profit from these growth stocks for many years to come.

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Brian Withers owns shares of Atlassian, Shopify, and Twilio. The Motley Fool owns shares of and recommends Atlassian, Shopify, and Twilio. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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