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SaaS Stocks Stumble Over Down Market, Drop 5% In Single Session

Tech stocks struggled on Monday amidst a broader selloff. The tech-heavy Nasdaq index slipped 1.6 percent to 7,333. The index entered correction territory, closing the day sharply under its 52 week high of 8,176.

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The selloff comes after Uber and Lyft posted disappointing IPO results and the tech sector itself has come under increasing regulatory scrutiny. News that Apple and Google could come under anti-trust scrutiny in the United States spooked investors, worried that regulators could crack down on profitable enterprises or even break up platform players.

But while the big shops are driving the big headlines, one slice of tech that we track carefully had a particularly bad day. Let’s talk about SaaS.

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Software-as-a-service companies, better known as SaaS shops, have found favor with public market investors for building high-margin, recurring revenues. Investors covet the firms as their revenue is high quality and dependable. That means that they have high revenue multiples, or, more simply, that they are worth more than most other companies per dollar of revenue that they record.

It is unsurprising then, that, over time, SaaS companies have done well. The continued rise of Salesforce, the recent Zoom boom, and other SaaS-y players’ successes have been impressive. Indeed, SaaS stocks’ performance has been so strong that every company going public wants to mimic their revenue multiples, with mixed results.

Tracking that success, long-time Crunchbase News readers will recall, is Bessemer’s new cloud index, an effort with the Nasdaq to keep a good eye on the market for SaaS stocks.

Here is what is put up today, in terms of points:

In chart form, inclusive of today’s trading, this is what it looks like:

BVP_Cloud_Index_Plot

That final data point is today’s result, the impact of the five percent change in value.

Five percent in a single day, for those of you out there with better things to do than watch the stock market, is a lot. A single stock may move five percent after reporting earnings. For an entire sector’s worth of stocks to drop an average of five percent is the stock market equivalent of stepping on a rake, hard.

What does today’s action mean for private companies in the SaaS space? First, the positive sentiment (you can see recent gains in the Cloud Index’s chart) that has helped SaaS companies pad their valuations just took a dip. In effect, private SaaS companies were repriced today, they just won’t feel it for a bit.

Second, that IPOs of SaaS companies could slow, or debut at softer prices. If this happens, it could dampen M&A prices that mid-level SaaS shops might have hoped for. It’s a lot of not good, in other words.

But, also, it’s just a single day’s trading. So, mark this in your head, and then get back to work.

Illustration: Li-Anne Dias.

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