Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
This week shares of SaaS and cloud companies reached new record highs as investors bid their equities higher following an earnings cycle that came in better than some expected.
SaaS stocks, as measured by the Bessemer-Nasdaq cloud index, closed at a 1,484.93 yesterday, a record, and just a hair under its intraday high of 1,491.59.
The raw numbers matter less than the index’s movement. From highs of around 1,400 in March, the index dropped to 892.60 during the early-year market selloff. Since then, SaaS and cloud companies have come roaring back. This is reflected in the new, higher valuation multiple that the companies are priced at by investors today, namley an enterprise value/revenue multiple of 14.7x.
So let’s take a look at why the SaaS cohort is the apple of Wall Street’s eye. There isn’t a single reason, but we have two that are worth considering. (Also up ahead: Notes on a chat with Alteryx’s CEO and a working definition of socialism. It’s Friday, let’s have some fun.)
A reminder
Briefly, we observe movements in the value of public SaaS and cloud stocks because they inform private market investors about possible exit values for startups. This helps VCs price venture rounds. So, in a somewhat slow mechanism, public values of a stocks help price startups. Given the portion of venture capital dollars and the amount of startup effort that goes into the SaaS space (AI companies are often built using SaaS models, lots of consumer apps are SaaS, and business software is lucrative), we care a lot about the value of SaaS and cloud stocks.
So is the run-up in SaaS stocks, therefore, good for startups? Yep. Now let’s get into why clouds shares are going up.
A meditation of the morality on capitalism
I’ve had to change how I describe my personal economic philosophy. I used to call myself “a capitalist in favor of a strong social safety net.” That was shorthand, but I share it to note that I’m not in favor of either arrogating the commanding heights of the economy to central control (socialism) or abolishing private property (communism).
But recently I’ve been forced by reality to add all sorts of contentedly lefty clauses to the comment, such as: “I am in favor of higher corporate tax rates to help fund the government; I am opposed to toothless regulatory oversight; and I am opposed to a government running on MS-DOS while Jeff Bezos beams down his dreams to us working stiffs from his latest cloud drone.”
What I’m saying is that it’s a weird time to watch the stock market. The rising disconnect between the financial health of regular folks, compared to how the stock market is describing corporate health, is gross—hence the changes to my personal economic philosophy.
It’s become a nearly morbid task to watch the markets rise every time the news is bad. Millions of newly unemployed? Stocks go up! Uber and Lyft tell investors that they are going to lose several treasure ships full of gold this year and post massive revenue declines? Stocks go up! U.S. COVID-19 data is awful and thousands are dying every day? Stocks! Go! Up!
It’s all very macabre and is going to make lots of the youth pretty opposed to American-style capitalism.
SaaS and cloud stocks, however, are a different story. The news from this particular group public has been less bad than in other sectors. (Of course, SaaS companies that service the hospitality or travel industries have been hit hard, but not every SaaS or cloud company is Toast.)
To pick an example, I spoke with Dean Stoecker, CEO of Alteryx, to riff on his company’s recent earnings report. Alteryx is an analytics company with a focus on “self-service data” work. As you can see from its pricing page, it’s SaaS. It went public back in 2017 for $14 per share, and it is worth around $119 per share heading into trading today.
The company withdrew its 2020 guidance and missed expectations on per-share profitability in Q1. Even more, its Q2 guidance wasn’t super aggressive in growth terms. But its shares have been recovering since early March lows and are largely flat this week.
Why? Because the company has tons of cash, and it looks like it will to get past COVID-19 in pretty good shape. The firm was even clear that things are harder in the current period. Here’s the Alteryx CFO on the difficulties it saw towards the end of Q1 on its earnings call:
However, in March, we saw activity levels slow considerably. This was particularly evident with opportunities with new customers and expansion opportunities that were not attached to a renewal. Although, as Dean mentioned, we did close a number of transactions with companies in highly impacted verticals such as travel and hospitality, manufacturing and retail, we did experience lower expansion rates from these verticals as these companies focused on difficult decision to realign their operations in response to COVID-19 and the macroeconomic slowdown. Finally, we experienced a moderate increase in our churn rate, most notably in Europe.
Investors? Not worried. Why? After talking to Stoecker, I think I understand it. The general vibe that the CEO projected during our call was that the secular trends that drove his company through 2019 were still in place, and thus the market disruptions — while not great, no one likes seeing their market soften — will pass in time and the “digital transformation” of the world will continue. It’s a bit like the public market equivalent of saying that “software is eating the world,” as VCs are wont to do when they run out of personality.
And while other industries slow, SaaS and cloud companies are still seeing demand rise. E-commerce ripping north? Shopify skyrockets. World stuck at home? Twilio crushes Q1 and shoots higher. Even Dropbox is up after earnings. Okta? All-time highs this week. The list goes on.
So while it may feel gross that stocks are heading up while working people struggle with layoffs amidst living with little to no savings, a failed safety net, and a national bent towards avoiding keeping citizens healthy, it’s a little harder to get mad at recent SaaS gains; the optimism is underpinned by either strong recent results or the expectation of a return to faster growth.
That the index is back to all-time highs is a little harder to grok than a mere recovery from lows. But as Graham taught us, stock markets are short-term voting machines and long-term weighing machines. We’re living in a never-ending short-term cycle this year. The record highs are thus just capital voting more highly in favor of recurring, high-margin revenue than most anything else.
That makes some sense. What else are you going to buy? Fucking fracking stocks?
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