What happens when public SaaS companies don’t meet heightened investor expectations?
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Image Credits: Nigel Sussman
Late last week we discussed how, this deep into the earnings cycle, it appeared that public SaaS and cloud companies had largely made it through the Q2 gauntlet unscathed. Sure, through last week there was a report or two that wasn’t stellar, but by and large the results had been good and SaaS valuations were happily near all-time highs.
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That’s still the case today, albeit with some caveats. Yesterday, a few public SaaS and cloud companies were dinged sharply by investors after reporting their earnings and I want to talk about why.
My hunch: Many SaaS companies that investors expected to accelerate during this period of more-rapid-than-anticipated digital transformation are not, or at least not enough to match market hopes. That means that their results were not quite what investors expected. And, thus, down went their share prices.
The analogy for startups is pretty clear here, just slower. Public valuations are updated far more often than private valuations, so the stuff we’re seeing today in SaaS stocks won’t show up in SaaS startup valuations for a bit. But I wonder if the same expectation/reality gap that we can discern in a number of recent SaaS results could hit startups as well, with boards that were expecting more than will be delivered in time.
Overall, SaaS and cloud valuations are still strong. Zoom crushed the period. Salesforce did well, too. And with valuations high, revenue multiples remain historically stretched. So, I don’t think that today’s news changes the general market dynamic toward public SaaS companies, and thus SaaS startups. But yesterday’s results are a bit of a warning sign all the same.
Let’s explore.
Whoops
Friend of the column Jamin Ball compiled a list of the SaaS companies reporting yesterday, including MongoDB, Guidewire, Smartsheet, CrowdStrike, PagerDuty and Zuora. Those are the companies whose results we are exploring today.
To keep this post from becoming interminably long, we’ll be brief and direct. So, in bullet points and with terse language:
- MongoDB: Shares up 2.2% in pre-market trading. MongoDB beat on revenue ($138.3 million versus $126.8 million expected), and per-share profit. It also guided higher for current-quarter revenue than expectations ($137 million to $139 million versus $130.6 million). So, MongoDB managed to crush earnings, smashed expectations and was rewarded with a tiny 2.2% gain this morning. That result is not a counterexample to our thesis. It’s early confirmation.
- Guidewire: Shares up 3.9% in pre-market trading. Guidewire crushed revenue expectations, reporting $243.67 million in top line against expectations of around $209 million. Profitability was also sharply higher. Why aren’t its shares up more? Because the company’s new fiscal-year guidance is under expectations, as is its next-quarter result. Wall Street appears to think that the company is sandbagging a bit, and isn’t taking it down too far, but a mere 3.9% gain after smashing growth expectations is punishment of a sort. This is the company that reported that least fits our thesis.
- Smartsheet: Shares down 7.8% in pre-market trading. Smartsheet crushed revenue expectations in its quarter, reporting top line of $91.2 million (up 41%!), instead of an expected $86.6 million. The company also guided to $94 million to $95 million for its current quarter, which landed ahead of expectations of $92.8 million. And the company’s current fiscal year revenue guidance ($367 million to $373 million) is ahead of expectations ($364.6 million). So what gives? Slowing subscription revenue growth wasn’t encouraging, which was perhaps enough to discourage investors. But look at the company’s share price change compared to its revenue performance. Wild, right? And indicative of investors’ pricing SaaS companies like they are all JATO-equipped instead of merely quick.
- CrowdStrike: Shares down 10.1% in pre-market trading. CrowdStrike started making money and crushed growth expectations in its most recent quarter and its shares are down sharply. The company’s $0.03 adjusted per-share profit came from an 84% revenue gain to $199 million, ahead of an expected $188.5 million result. CrowdStrike expects to best anticipated results in the current quarter, with a slimmer loss and revenue of around $213 million at the midpoint against expectations of around $196 million. And its shares are down? Investors.com notes that the company had a hell of a run into earnings, which makes sense. Anticipation seems to have kept building, and after CrowdStrike only managed to best the older expectations, down went its shares. A big deal for the company? Not at all, but indicative of how stretched some SaaS valuations have become, that a quarter like this causes a double-digit percentage loss in market cap.
- PagerDuty: Shares down 23.3% in pre-market trading. Here we hit choppier waters. As Ball points out, the company met expectations for revenue growth with $51 million in top line. But, PagerDuty’s next-quarter guidance ($52-$53 million) versus expectations ($53 million) did not inspire. And, its shares lost about a quarter of their value as of the time that I write this for you. PagerDuty was priced to beat, and merely meeting or just-missing near-term growth expectations was a big no-no. Notably the firm’s full-year guidance ($206 million to $211 million) is in keeping with analyst averages ($208.2 million, per Yahoo Finance.) That was cold comfort, however, to investors.
- Zuora: Shares down 25.2% in pre-market trading. Zuora reported $75 million in revenue, against expectations of $75.5 million. The company expects $73 million to $75 million in current-quarter revenue. Analysts had expected $75.5 million, again. A miss twice, though modest in terms of the delta between reported and anticipated numbers. Zuora took hard lumps from its results as it had just seen its shares soar from the high $11s to over $16 per share. It is now back under $12 per share, at least according to pre-market trading. Rising expectations drove its share price higher, and then slightly lacking performance undid a huge rally, thus making Zuora fit our thesis neatly.
You don’t have to read all of that with my perspective, or agree with my take. But the dissonance in some SaaS and cloud earnings reports between implied expectations that are often higher than stated analyst targets, and what companies are reporting is notable. And it is that gap, according to my own read of the figures, that is driving down a number of SaaS firms’ value.
Startups get valued less frequently, but many are repricing today in a mid- and late-stage SaaS venture capital market that I am told is red-hot. Let’s hope those growth rates persist, or else we could see a reprise of the above down the road for a lot of startups when they go back to the trough.
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