- Some of the fastest-growing technology companies have fallen in value in recent weeks as the Federal Reserve signals rate hikes.
- The Dow Jones Industrial Average has outperformed the Nasdaq Composite Index so far in 2022, a reversal from the past five years.
- Index Ventures partner Nina Achadjian, who previously worked at Google, called the sell-off a “buying opportunity.”
Cloud software has been one of the best bets for investors over the past half-decade. But that trade has been open fast of late.
The recession, which began in November and deepened this week, is part market rotation, part economy reopening from the pandemic, and part concern that the Federal Reserve will Expected interest rate hike This particular sector will have a huge impact.
For years, cloud computing services were some of the biggest gainers in technology, outperforming the broader market itself. Since Bessemer Venture Partners has created BVP Cloud Index The number of publicly traded companies is up 909% in August 2013, nearly triple the Nasdaq’s gains and five times better than the S&P 500’s performance.
COVID-19 proved to be a huge boon, as companies, schools and government agencies transitioned to the cloud to enable remote communication, collaboration and access to storage tools. E-commerce software vendor Shopify, video chat service Zoom and e-signature provider DocuSign were among the big winners, all reporting huge revenue growth in 2020 and the stock rising well into the triple digits.
Those software as a service, or SaaS, stocks have since fallen out of fashion. While legacy computer and printer maker HP Inc. is hitting new highs and the Dow Jones Industrial Average is only down slightly this year, the work-from-home darling is suddenly in a bear market.
Zoom and DocuSign are up more than 50% from their 52-week highs and Shopify is down 34%. Asana was the best-performing US tech stock as of mid-November last year. The provider of project management software has since lost 58% of its value.
Cloud stocks as an index are down 29% from their November highs.
Byron Dieter, a venture capitalist who has invested in software start-ups in Bessemer, said Tuesday that the market has taken a “30% after-Christmas sale discount” on cloud stocks.
“Across the basket, the cloud industry and software as a whole have just been hammered,” Dieter told Businesshala’s “TechCheck.” “Fundamentally these businesses continue to be the drivers of the new economy, and we have to remember that all the trends in the 2020 market that people were excited about a year ago, when this basket returned almost 100%, are still there today. remains.”
High interest rates can pose challenges for much of the market, but they represent a notable roadblock for cloud stocks, especially for companies that aren’t making money yet. Investors value companies based on the present value of future cash flows, and higher rates will reduce the amount of that expected cash flow.
Minutes of the Fed’s December meeting released on Wednesday gave further fuel to investors who are positioning their portfolios for rising rates, as the central bank prepares to dial back its pandemic-era easing monetary policy .
The WisdomTree Cloud Computing Fund fell more than 5% on Wednesday and is down 10% for the week at Thursday’s close. The index is on pace for its second worst week since the pandemic began, with the only sharp decline coming nearly a month ago.
“I think SaaS is generally down because you’ve seen interest rates going up, and there’s a very tight correlation between high-growth software relative to interest rates,” said Khozema Shipchandler, Twilio’s chief operating officer, which sells back. Is the end software for communication.
Twilio’s share price has fallen 46% since the beginning of last year, even though earnings and revenue exceeded estimates every quarter. Sales jumped 65% in the third quarter, while its plethora of cash and marketable securities rose to $5.4 billion from $3 billion at the end of 2020.
“I’m not too worried about it,” Shipchandler said of the share price. “I have $5 billion in cash on my balance sheet. I know I can survive basically any cycle.”
Investors in the space see the same thing.
“I think this is a buying opportunity,” said Nina Achdjian, partner at Index Ventures. “The fundamentals of these companies haven’t changed.”
Continued revenue growth coupled with falling prices means that the sales multiples investors pay have been narrowed. Last February, cloud stocks were trading at an average of 16x forward revenue, according to BVP Index. Now they are at 10, the lowest since May 2020.
According to FactSet, Zoom’s sales are up 14 times on a previous basis, down from a peak of 189. DocuSign’s multiple falls from a high of 50 to sit at 15.
While not every cloud vendor has the cash cushion of Twilio, Zoom or DocuSign, many companies in the space sport high software margins and are promoted by subscription businesses that continue to show strong retention.
“These are recurring-based models,” said Michael Turin, an analyst who covers cloud companies at Wells Fargo. “They have really good visibility into the underlying business model.”
Turning those fundamentals into good investments can take patience. The Nasdaq index outperformed the Dow every year from 2017 to 2021. In the first week of 2022, the Dow managed to post a narrow gain, while the Nasdaq is down 3% and Cloud stock is declining.
— Businesshala’s Ari Levy
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