SaaS stocks are back there again, and I think I figured it out.
More specifically, I think I understood what other people think it is happening. After a rigorous fact check by reading the tweets, getting me on the phone by VCs, and chatting this morning with the CEO of a $ 27 billion cloud company, it all makes sense.
Some information to start with, I think.
Friday, May 21, the day after the economy lost 2.4 million jobs, bringing the number of COVID-19 jobs lost to nearly 40 million, SaaS and cloud inventories have reached a new all-time high, as measured by the Bessemer cloud index.
This particular basket of stocks is the best thing we have to understand how public investors assess SaaS companies at any given time. And as I have it made you read ad nauseam, public SaaS assessments have an impact on private SaaS assessments; the mechanism is a bit slow because Mary D’Onofrio de Bessemer Explain here, but when SaaS stocks go up or down, SaaS start-up valuations also change.
Another record today after several previous records this week seems strange, given the world. Sure, the stock market is largely recovered from its March lows, driven by COVID-19, but the successive new records are more lewd than just working to go flat, like other cohorts of public capital have generally been successful (not all, mind).
Whether we are at a record is more than my idea, or Bessemer – Meritech Capital wrote earlier this week that "We are now sitting at the top of all-time public SaaS assessments in the midst of a global pandemic." But don't think that these valuations are based on companies that promise more growth. As the same Meritech report states: "Overall, the outlook for these companies has not changed much since February, with the exception of the first quarter results where, in almost all cases , management waved a yellow caution flag for investors and withdrew or lowered its forecasts. "
There are some warning signs that growth will slow, Jamin Ball by Redpoint noted on Twitter:
But what does it matter! Not the markets. It's time for another fuck recordings, you all.
Let's see why all of this is happening.
Here is the argument in a nutshell:
- Investors want to embrace growth, and while many companies are struggling to grow, digital is still not working well enough, so capital is flowing from other stocks to stocks of digital companies, many of which are SaaS companies. This trend is accelerated by:
- ZIRP, or the era of free money. After a hot second of rate hikes (quickly beaten by POTUS and then beaten by a plummeting economy), money still costs nothing and the returns are therefore burning garbage. This has led investors to look for any place to fill their profit which could provide some sort of return. Thus, capital moves away from safer things (hue, security!) And instead flows where a return could be found. Like SaaS.
- The two points above (rather related) are made a little more reasonable by the fact that digital transformation that CEOs and CTOs and every webinar you've ever been invited to are now going at a distorted speed. Like, no shit, it's a real thing, not just something Levie tweets about when his engagement figures drop. This acceleration makes investors very excited about what could happen later. SaaS stocks are therefore increasing.
This morning I spent 30 minutes screaming with Splunk CEO Doug Merritt. It went pretty well. After digging report on the results of his business (The SaaS transformation continues, some headwinds to revenue recognition, lots of money, good ARR growth, and the company spends a lot of stock around all of its employees, which I dig) I asked him if the digital transformation things he had mentioned in Splunk's revenue letter accelerates the transition to the cloud and thus stimulates SaaS stocks.
So what's fueling the SaaS rally, stretching the valuations to comical levels – remember that we always rate SaaS and cloud companies on earnings, not profit multiples, so they're still ranked on a comfortable curve – is greed in two parts (capital rotation in SaaS shares of other shares, and ZIRP limiting the return to only a few compartments of assets) and part of common sense (if SaaS companies follow the trend of digital transformation, an acceleration of this could increase their long-term growth prospects).
I got it?
Anyway, I'm on vacation for next week as soon as it hits the internet. Have fun, everyone, and let me know what happens to SaaS actions. I'm sure my partner will finish me if I keep up to date on the stock market when I'm supposed to be napping. Cuddles.