Today was a poor day for SaaS and cloud companies in the public markets. Analyst downgrades and changed pricing targets appear to be the culprit for the selloff.
Shares from Slack, ServiceNow, Splunk, Atlassian, Dropbox, Datadog, Box, Cloudflare, and others fell in regular trading today. From a few points to over seven, it was a sufficiently bad day that the BVP Nasdaq Emerging Cloud Index (an index set up by Bessemer and the Nasdaq to track cloud stocks) fell 2.8 percent, a sharp decline for a single trading period.
The Emerging Cloud Index, now worth 1,122.01 points, is down from its peak of around 1,300 from July of this year. The index remains above its year-ago level of 911.98; however, while SaaS and cloud stocks have appreciated in the last year, they have shed value over the past few quarters despite posting growth during those intervals.
What results from flat-to-down valuations and growing revenues since the summer? Revenue multiple compression, of course. And that’s somewhat critical for startups out there using public-market comps to determine their value.
Shares of popular workplace communication service Slack fell 4.45 percent today to $23.64. The company, valued at fractionally less than $13 billion, is now worth less than its direct listing reference price. The situation, while not great for Slack, isn’t as bad as it might seem; we’ve written that the company’s value decline appears to be driven more by the market deciding to price the company merely richly, instead of extravagantly.
The broader selloff, however — coupled to an implied revenue multiple compression — paints a stagnant picture for SaaS companies more generally. That isn’t bullish for a critical and lucrative venture category, even if sentiment among private companies is still positive towards the business model.
Behind the day’s selloff was a number of SaaS downgrades and pricing changes that MarketWatch covered here and here. The short version is that growth concerns led to downgrades and price-target reductions, and so the entire segment lost a bit over 25 basis points in one gulp.
Tomorrow, the same companies could rally, putting another ugly day behind us. But at some point, one of these tough days for SaaS and cloud companies won’t be immediately erased. And then the valuation compression that we can calculate on the public markets will cause more pain amongst private companies.
Illustration: Li-Anne Dias.
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