Zoom’s earnings to test hot tech valuations

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

This week will see two richly valued SaaS businesses share their Q1 earnings reports: CrowdStrike and Zoom. Both are 2019 IPOs, but these relatively young public companies have enjoyed a strong run in the public markets this year.

Zoom started off 2020 worth around $69 per share; today it is worth $179.48 ahead of the start of today’s trading. CrowdStrike started the year at a little over $49 per share; today it’s worth $87.81 per share. The business-focused, but consumer-friendly video chat service Zoom and the cybersecurity-focused CrowdStrike are perfect examples of the updraft that SaaS businesses have ridden this year.

With both firms reporting earnings at the same time, we’ll get notes on the work-from-home trend, and how it is impacting services that help make remote-work possible. CrowdStrike’s earnings will inform us on how the cybersecurity space is performing — are businesses shelling out more than expected to keep their networks and employees safe when so many are out of the office?

If Zoom and CrowdStrike report results that disappoint investors, they could do more than just deflate their own shares. Missed earnings reports from either could puncture SaaS valuations more broadly, perhaps impacting private valuations for companies that are in the market for new capital. Why?

Prominence and timing.

Earnings expectations

Investors expect CrowdStrike to report $165.3 million in revenue in its most recent quarter, generating a $0.06 per-share loss. The company generated $96.1 million in revenue in the year-ago quarter, giving the company an expected growth rate of just over 72%.

Turning to Zoom, investors expect $202 million in revenue in its most recent quarter, leading to a profit of $0.09 per share. The firm had noted before that it was seeing rising free usage, which could impact its gross profits. In the year-ago period, Zoom generated $122.0 million in revenue, giving the firm an expected growth rate of around 65.5%.

Did you expect faster growth rates, given that — per YCharts data — CrowdStrike is worth just under 36x times revenue and Zoom 78x? If you did, I understand.

This is why the two earnings reports, and Zoom’s more than CrowdStrike’s, matter. The market is valuing SaaS stocks like they are going to smash expectations. And if this particular pair do not, then their business category could see investor sentiment regarding its prospects slip.

SaaS valuations have risen in recent weeks, setting successive all-time highs. This makes new information regarding the performance of companies inside the business model sector more important than usual. And given that these two particular companies are reporting with their huge multiples, the stakes are even higher.

We’ll know a lot more on Tuesday afternoon, with notes in this column on Wednesday morning to fill you in entirely.

A hopeful rebound

Check the following chart, which I’ve clipped from Bessemer’s cloud index page:

Image credits: Bessemmer Venture Partners

The blue line is the one we care about; it’s tracking the basket of cloud and SaaS stocks that are public today. As you’ll note, these companies took a sharper hit in March than the major, broader indices (the other lines) that are well known in the United States.

But since then, SaaS and cloud shares have been on their fastest run ever, at least as far as I can tell. This as the domestic economy crumbles. Investors are about to get a bit more information on whether their wager that software companies (and therefore their stocks) will be able to transcend the economic carnage is accurate.

And if it isn’t, we’ll see SaaS startup valuations come under even more pressure.