☁️ To BTFD, or not to BTFD
Cloud stocks broke a 4-week losing streak to finish the week up 0.6%.
Volatility. Gains were hard fought as large daily changes (+4% Monday, -5% Tuesday, +5% Friday) masked even wilder intra-day swings. $WCLD posted its 2nd biggest, same-day swing (10%) EVER on Monday.
De-risking/rotation. Strongest sectors remain interest-rate sensitive energy and financials. Recent IPOs (-3.5%) and biotech (-1.6%) underperformed.
Bears vs. Bulls. A hawkish fed meeting and rising tensions between Ukraine and Russia were offset by strong 4Q GDP growth and solid results from multiple software leaders (Microsoft, ServiceNow, Atlassian, and Qualtrics)
Multiples. "High growth software multiples are still elevated. Looking at high growth software median only - we are still 26% above pre-covid highs, 49% above where we were on Jan 1, 2020, and right in line with the previous peak in September 2019." - Jamin Ball (chart below)
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🐂/🐻 BTFD?
Place your bets
With Cloud stocks down ~35% from November highs and Nasdaq squarely in correction territory, investors favorite pastime has pivoted from calling hypergrowth to bottom picking.
Here's what I'm seeing:
1️⃣ 👍 Fundamentals remain strong
We've mentioned the demand environment remains strong for the last 2 weeks: 1) VCs remain focused on hunting for mega-trends and 2) 3 Bullish Signs on Cloud Spending.
The signs continue.
Jeff Richards noted systems integrator (SI) are seeing demand "off the charts":
Chris Conforti (Altimeter Capital) is pointing to strong bullish earnings and underlying demand as signs of support in software:
2️⃣ 👍 Positioning light and technicals nearing historical lows
Lowest positioning for tech since December 2008:
Only 17% of NASDAQ stocks above the 200-day moving average (the lowest since April 2020):
3️⃣ 🤙 Valuation normalized, but not necessarily bottomed
Jamin Ball noted "high growth software multiples are still elevated" (discussed more above).
Jared Sleeper noted "there's still ~24% downside to the average 'bottoming' multiple" and high-growth stocks are unlikely to outperform in a broader market downturn. That said, lower multiples should be supportive to M&A.
4️⃣ 🤙 The "professionals" remain mixed
Banks remain focused on rates and HF capitulation to call the market bottom:
JPM: "We hadn’t seen consistent signs of capitulation by HFs" (ZeroHedge)
Stifel: 5 signs for correction to end: 1) Fed to turn dovish, 2) PMI bottoms, 3) M2 money supply has to bottom, 4) EPS beats vs. misses have to bottom, 5) Ukraine settled with minimal impact (ZeroHedge)
Goldman: “Any further significant weakness at the index level should be seen as a buying opportunity, in our view” (ZeroHedge)
Citi: “Rapid de-rating of growth stocks may slow as real yields stabilize,” adding that their bear market checklist - which screens for various fundamental and market factors - is suggesting to buy the dip.(ZeroHedge)
5️⃣ So where to put your money?
Jeff Richards suggests founder-led software companies with strong underlying growth, positive customer economics, and large TAM:
⚾ Inside Baseball
Great thread on the ins and outs of VC valuations as public multiples fall:
Jeff Richards reminds new employees to fully understand option pricing when joining new firms in the face of falling multiples:
And Nick Mehta (CEO, Gainsight) had a great LinkedIn post (April 2021) on the potential downsides after a large fundraising round:
🤔 Tweets I'm Thinking About
Great Thread from Manav Shah on Low Code/No Code Tech:
Frank Slootman with his new book out. Heavy focus on execution and focus above all else:
With blessings of strong NRR,
Thomas
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