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DigitalOceanWith a market cap of under $10 billion, cloud services provider DigitalOcean might seem ill-fated given that it's competing with giants such as Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Amazon, and Microsoft (NASDAQ: MSFT).However, the massive size of those leading players and the rapid speed at which the SaaS industry has been growing has left room for smaller contenders. But many SaaS companies have dramatically exceeded this rate of increase, making them investments with great potential in today's market.Two companies that I expect will produce considerable returns for investors long-term are DigitalOcean (NYSE: DOCN) and Twilio (NYSE: TWLO).Image source: Getty Images. Market research firm Valuates forecasts that the SaaS market, valued at $158 billion in 2020, will grow at a compound annual rate of 12% through 2026.
Additionally, by slowing the growth of expenses, it managed to turn an operating profit of $624,000 during that period. Such services and support helped the company generate $197 million in revenue for the first half of 2021 - a 32% increase from the same period in 2020. This allows these professionals to find and offer support to workers who might be the only IT professionals at a given business. And in the wake of its recent purchase of Nimbella, it is also embracing serverless computing, which allows developers to run apps, websites, and APIs without worrying about the infrastructure that supports them.Moreover, DigitalOcean has fostered a community of developers. Unlike its large peers, DigitalOcean emphasizes direct, easy-to-understand offerings with straightforward pricing plans.It offers cloud services, including a wide array of SaaS services that can meet the needs of most small businesses.
The communications-platform-as-a-service (CPaaS) provider plays a vital role in the apps of Uber, Lyft, and Airbnb.Admittedly, CPaaS is not exactly proprietary technology, and Twilio faces competition from the likes of Microsoft , Cisco, and Avaya. Nonetheless, the larger players could struggle to replicate the sense of community that DigitalOcean offers its clients, which bodes well for the emerging cloud company.Twilio is not quite as well-known as some other SaaS majors, but chances are, you are a consumer who interacts with its software. Consequently, its price-to-sales (P/S) ratio has shot above 18, much higher than Microsoft's sales multiple of 13 or Alphabet's P/S ratio of 8.Such a high valuation multiple might cause concerns if the large cloud companies took a greater interest in DigitalOcean's target market. Since its March 24 IPO, its share price has more than doubled, and the stock was trading at around $79 as of Monday's close.
This improvement may explain why Flex is one of the market's fastest-growing SaaS products. Previously, developers had to build such systems from scratch. And because switching from one CPaaS provider to another is a difficult transition, Twilio's clients have tended to remain loyal to its ecosystem.The company further widened its moat by developing Twilio Flex - a cloud contact center that clients can program to deploy where, when, and how they choose.
This led to a loss of $434 million in the first half of the year, well above the $195 million loss reported in the first six months of 2020. Its expenses grew at a faster rate than its revenues, and the expenses included costs related to the extinguishment of convertible notes.
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