Business Public Markets

Well-Known SaaS Stocks Stutter And Slip, Possibly Dinging Startups

Today, after the bell, a number of well-known cloud and SaaS companies reported their earnings. The impact of those disclosures to their share prices were sharp in many cases, with several well-known modern software companies losing value.

Slack, a productivity-focused SaaS company and recent direct listing, lost about 15 percent of its value after reporting its Q2 earnings. Smartsheet fell around 8 percent. MongoDB lost just over 2 percent Pivotal managed to stay flat after reporting its financials. Cloudera, contra to the rest, saw its value rise after-hours following its financial news.

The sum of the results is generally negative. We care what the aggregate means for startups, as public investors’ feelings toward a type of company can affect how private investors feel toward that type of company. And as sentiment drives prices and investment decisions, it matters. Let’s explore.

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Slack reported revenue growth of 58 percent compared to its year-ago quarter in its first earnings report as a public company today. The company’s revenue came to $145 million in the quarter, beating analyst expectations of $140.7, according to CNBC and Refinitiv. The company also said it had a gross margin of 78.5 percent, and gross profit of $113.9 million. The firm’s gross margins were far better on a non-GAAP basis, stripping out share-based compensation costs related to its direct public debut.

Slack ended the quarter with more than 100,000 paid customers, which represents 37 percent more year-over-year. For the third quarter, Slack expects revenue to be between $154 million and $156 million, with GAAP operating losses between $47 million and $49 million. The company’s revenue expectations landed ahead of analyst projections.

But despite its revenue growth, its shares still slid nearly 15 percent in after hours trading. And herein lies the why that is so critical to today’s earnings (we track lots of earnings at Crunchbase News, but cover very few; we only do so when they appear pertinent to startups that we are also interested in).

Why did Slack lose so much ground? There are three hypotheses that we’ve seen that appear reasonable:

  • Billings growth was lighter than expected.
  • Certain SaaS metrics (retention) are trending down.
  • The company’s revenue losses due to downtime are worrying.

The first two are related, and probably somewhat Slack specific. The final entry is notable in that it could apply more generally. That’s to say that uptime promises tied to contra-revenue credits can create material headline for a business. Tread accordingly.

The Rest

Looking at the rest of earnings results, it’s a bit of a mixed bag. Smartsheet, the other recent SaaS IPO reporting today that we had our eyes on, beat expectations, but posted mixed guidance. (As SeekingAlpha reports, it has better-than-anticipated revenue expectations but worse profit guidance.)

The climate, however, behind the current SaaS earnings cycle is one I’d say of caution. Box has seen its shares fall as growth has slowed. Dropbox has endured a similar fate. Box, in fact, fell so far that it’s now expected to be in play as an acquisition target.

Finally, our favorite SaaS and cloud stock barometer, the BVP Nasdaq Emerging Cloud Index, is roughly flat since April. It’s up from the start of the year, yes, but it’s stopped going up. That’s a change in result.

It’s too early to say we’re seeing a trend. But it does feel like SaaS stocks are having a harder time impressing public market investors. And that could impact private investor sentiment, and thus private companies’ valuations.

Illustration Credit: Li-Anne Dias

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