SaaS Stocks Near Record Highs As The Second Half Of 2019 Kicks Off

Morning Markets: It’s a pretty good time to be a SaaS company, even if some players in the space have taken lumps in recent months.

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The Crunchbase News team is hard at work on its quarterly reporting cycle. We’ll have a wealth of information coming over the next week on the global venture scene, as well as a number of more focused entries on specific elements of the venture landscape.

But this morning I wanted to look at a set of older companies in a key tech space in hopes that their recent performance helps us better understand market sentiment regarding tech. Yep, we’re looking at SaaS once again.

Stocks, Heck Yes

Businesses that sell software as a service, better known as SaaS companies, are no longer on the leading edge of a new business model. SaaS is now how most software is sold. This makes public SaaS companies important for private software companies, as the performance of the former in the public markets can impact the value and fundraising options of the latter.

So, while we are about to rip the lid off what the venture industry got done in Q2 2019, peeking at how public SaaS companies have performed recently could help us understand how venture may run for SaaS companies in Q3 2019, the current calendar period.

As we kick off the third quarter, how are SaaS stocks doing? They are mere points off record highs, at least according to the BVP Nasdaq Emerging Cloud Index, our regular friend. Today, the basket of stocks is worth 1,248.21, a sliver off its 52-week, and all-time high of 1,253.05.

This means that SaaS stocks are healthy and in demand, something underscored in recent weeks by the success of Slack’s direct listing and the ensuing rise of its shares after the listing.

We cannot say, from this data point, that SaaS companies will raise well in Q3. But we can say that the public market signals are strong. So, if SaaS companies struggle to raise fresh rounds, that result would be contra-expectations, giving it extra weight (implying venture capital disinterest to a large degree). But since public SaaS shops are swimming in such warm waters, it’s hard to imagine that private SaaS companies won’t catch a ray of the same sun.

11x

Wrapping quickly as we’re nearly onto the holiday freeze here in America, according to venture collective Bessemer (the folks behind the above-cited index) the SaaS and cloud companies present in its index are trading at an 11x enterprise value/revenue multiple. Think of this metric as similar to a revenue multiple, but instead of dividing market cap by revenue, we’re using enterprise value, a different but related metric.

We joked about the basket of companies hitting a 10x multiple ages ago. To see an 11x result is just impressive. That historically high multiple combined with top-line growth, built the following chart, also via Bessemer:

The blue line is the index, and the other three lines are the major exchanges from August of 2013 through July of 2019. Damn.

Illustration: Li-Anne Dias.