☁️ State of Cloud May 2022
Cloud stocks ripped 5.5% in the week ending May 27, 2022 but underperformed major indices
🤳 SNAP back. Snap, the social media app you never use any more, fell 40% and dragged down tech stocks on Tuesday as the company noted the macroeconomic environment deteriorated faster than expected. PINS, FB, TWTR, and GOOGL all sank.
🛒 Shoppers shop. Earnings from major retailers offset investor concerns that higher interest rates would limit consumer spending and potentially push the economy into a recession.
👉 What killed tech in 2020?
Multiple compression AND fundamental decline
We've now come full circle on multiples
Cloud stocks are now trading back at 6.8x (vs. ~20x peak)
High-growth names at only 8.4x (vs. >40x peak)
📉 Next Question: Are fundamentals at risk?
What happens in a recession?
Shocker, growth slows
And earnings can miss estimates
(meaning today's fwd multiples might be overstated)
💡 This is not 2020
Some important points:
1️⃣ SaaS is now dominated by recurring revenue which drives revenue and keeps the lights on
2️⃣ Tech revenue in 2000 was “capex” = easier to defer/turn off
3️⃣ “Software contract is better than first-lien debt.”
1) This is nothing like 2000.
Valuations for tech peaked in 2020.
At the 2020 peak on a cap weighted basis, the 10 largest tech companies in the Nasdaq traded at a 44% discount to the largest tech companies at the 2000 peak using NTM EPS and 58% discount using LTM EPS. pic.twitter.com/QlfmjxFIwf— Gavin Baker (@GavinSBaker) May 17, 2022
🤷♂️ So where does that leave us?
👍 Demand appears to remain strong
But certain business models are certainly more or less exposed
👇 It's hard to beat the capital efficiency of a scaled SaaS in a low-yield environment
Been trying to build a POV in my head for what may happen when the dust settles in the market. This is what I believe but I realize it could also be biased. Curious to get your feedback. Thank you! pic.twitter.com/jt6DpS65eM
— Semil (@semil) May 23, 2022
📌 A reminder
It's harder to rip out a CRM
Drives revenue/keeps lights on = first-lien debt
Vs. a data warehouse
Work process software like CRM is much harder to rip out than a data warehouse. I’ve seen a scaled digital corp switch out their data warehouse three times in four years.
— Michael Mullany (@mmullany) May 23, 2022
🤺 And consumption-based pricing cuts both ways:
Thinking out loud - consumption pricing clearly more volatile (in either direction) than SaaS. But - SaaS comes with "bloat spend." ie, seats you pay for but don't really use. With consumption you're paying for exactly what you use
When budgets contract, which gets cut first? https://t.co/Z5U8IxWNrv— Jamin Ball (@jaminball) May 23, 2022
good morning friends pic.twitter.com/ORCz225HOn
— ExitMultiple All Weather Alpha Fund I Partners LLC (@ExitMultiple) May 27, 2022
👉 Now what do you need to think about?
During a recession: Sales cycles, CAC, and discounting all go up
Check out last week's update: Chewing Gravel
☁ Your cash flow could be in danger@afc & @MeritechCapital out with a monster piece on valuations, recession case studies, and funnel considerations
Everyone loved the charts 📊
But here's what I took away 👇— Thomas Robb ☁️ (@BreakingSaaS) May 27, 2022
💵 ANOTHER reminder to watch your cash
@Katzenberg has been through a few challenging periods and wrote a great piece on surviving and thriving during a recession:
Taking control during a downturn
🌊 In choppy waters, you have to move fast
Bringing on a finance exec... "makes all the difference in the world when times get tough and you need someone who is analytical, forward-thinking, etc."
Started a software company in 1997, raised $125M, got crushed in dot com bubble. We failed to navigate choppy waters, partly because we didn't move fast enough to make hard decisions. When starting 2nd co, cofounder + brought in a Finance exec we trusted as a 3rd cofounder...🤞
— Jeff Richards (@jrichlive) May 18, 2022
💥 Check us out on Twitter!
1️⃣ multiples expanded precisely because companies like DDOG/CRM/TEAM consistently best estimates
2️⃣ generalists extrapolated this to ALL cloud names at the same time high growth names were IPOing
3️⃣ we’re now finding out this growth is more more expensive than expected— Thomas Robb ☁️ (@BreakingSaaS) May 30, 2022
With blessings of strong NRR,
Thomas
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