Valuations Compress Further As SaaS Stocks Finish Giving Up Their Summer Gains

Morning Markets: Despite the Nasdaq trading near 8,000, 2019 IPOs are taking hits and SaaS companies are down again this morning. As we close out this week, a quick look at some pricing trends.

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SmileDirectClub is down yet again today and Slack shed over 9 percent of its valuation this morning. Slack isn’t alone in its struggles this morning, by our count every single 2019 IPO is down today. Even worse, the average cloud or SaaS company tracked in Bessemer’s index is down nearly 3 percent today.

It’s an ugly way to cap off a week.

Not all companies are suffering, of course. Tech’s Big 5 (Apple, Microsoft, Alphabet, Facebook, Amazon) are worth $4.41 trillion and the Nasdaq is still over 8,000. So while there is weakness amongst some tech stocks, it’s not pervasive.

The issues with SmileDirectClub are something we’ve discussed in the past, but this was a surprise. I expect we’ll see lawsuits concerning this IPO before the quarter’s up.

But more importantly, SaaS’s repricing continues. This is a slow-moving story, I know, but it’s incredibly important for private companies and private investors. A good-sized portion of aggregate venture capital returns come from SaaS acquisitions and IPOs. You can tell this is the case, to pick one method, by going back through this year’s IPOs and noting the firms that meet the criteria (CrowdStrike, Slack, PagerDuty, Fastly, Cloudflare, Dynatrace, and so on).

To see SaaS take two hits of a few points apiece in the same week is, therefore, notable. For reference, the Bessemer cloud index, a basket of public SaaS and cloud companies, is worth 1,084.15 points at the moment, off 2.94 percent on the day. The index hit an all-time high in July of 1,303.60 according to the Nasdaq.

Today’s result, if it holds, will mean that SaaS companies have given back all their gains since February. The index is still above the lows it set as 2018 came to a close, but the return-to-form is being erased by public investors.

Earlier this week we wrote the following after a raft of bad news from analysts kicked the shins of a number of SaaS companies’ shares:

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.

That’s as true today as it was before, just a little more so as now the companies we discussed have lost another 300 basis points of value while posting a bit more growth that we’ll see in their Q4 earnings.

For now, however, the downward slide of SaaS stocks since the summer continues. Perhaps that’s why there’s only one venture-backed company on the IPO horizon, and it’s a China-based learning company.

Illustration: Dom Guzman