Cloud Stocks Dip, Dragging SaaS Valuations Down

Alex Wilhelm alex

Morning Markets: It’s too soon to call a correction, but modern software and cloud-powered stocks are taking a beating.

Just a few months ago, software-as-a-service (SaaS) companies and other public firms that provide cloud-based products were flying high. Their stocks were sharply higher than the popular American indices, and companies in those categories enjoyed high revenue multiples.

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Now, as the broader market hits turbulence into the Q3 earnings season, those same cloud companies are pulling back.

Here’s what the Bessemer Cloud Index (now the BVP Nasdaq Emerging Cloud Index), which tracks SaaS and cloud stocks’ performance over time, looked like in recent days:

Blue: Cloud Index. Red: Nasdaq Index. Green: S&P. Purple: DJIA. The chart begins in August 2013.

That’s a pretty severe drop! And, the recent downturn seems to be the largest in raw percentage terms of any we’ve seen since the 2016-era SaaS crash (that’s the point where the Cloud Index falls under the other lines about mid-way through the chart).

But while I would love to call for panic, I think what we’re seeing instead is some froth blow off the top of the SaaS market. Of course, if the broader market corrects further, we could see the SaaS market dip even more.

But certainly, everyone knew that this was going to happen at some point. If historical SaaS multiples were considered fair when they were in the low single-digits, revenue multiples as high as 10x weren’t going to last.

SaaS and cloud revenue multiples could fall by half and still be fairly valued by some historical models. Perhaps drops in individual stocks wouldn’t be that extreme, as the companies in question would grow during their declines, adding to their revenue base and thus blunting their value drop. Some.

The stock market can correct faster than any one company can grow, however.

We don’t call tops here at Crunchbase News, but we’re seeing some signs that the Never Ending Bull Market might be losing steam. For startups that depend on public-market comps to help value themselves, this is big news (more on that here).

Happy Wednesday!

Illustration: Li-Anne Dias