The prices of SaaS stocks ballooned over the past two years as the coronavirus pandemic made working from home a necessity. But now the market has changed again, and as we enter a recessionary economic climate, companies such as Salesforce, Atlassian and ServiceNow have seen a loss in value so far in 2022.
Pride comes before a fall — as software-as-a-service (SaaS) companies are finding. Following a stellar run during the coronavirus pandemic, which saw firms like Zoom [ZM] become household names, SaaS firm valuations are now plummeting.
The share price of Atlassian [TEAM] has seen one of the sharpest falls, wiping out more than half of its value so far in 2022. The stock was down 54.2% at close on 19 May, with Salesforce [CRM] and ServiceNow [NOW] recording declines of 38.7% and 34.3%, respectively, over the same period.
At the close on 19 May the Global X Cloud Computing ETF [CLOU], which includes Akamai Technologies [AKAM], Mimecast [MIME] and Dropbox [DBX] among its top 10 holdings, was also down 35.2% year to date.
The slump in SaaS stocks began in November last year but deepened in January as investors began to anticipate future interest rate hikes from the Federal Reserve. A high interest rate environment is expected to be particularly problematic for SaaS companies, particularly those that are not yet turning a profit.
“SaaS is just generally down because you’ve got interest rates going up, and there tends to be pretty tight correlation between high-growth software relative to interest rates,” Khozema Shipchandler, COO of Twilio [TWLO], told CNBC.
Can Atlassian’s diverse client base help it grow?
Atlassian was among the markets’ biggest losers this past week, falling 6.3% on 16 May. Over the past six months, the Australian firm’s share price has lost more than 60% of its value, despite largely positive earnings.
Atlassian's Q3 losses saw the company drop from profits of $160m year-over-year
Its fiscal third quarter results, released on 28 April, showed that quarterly revenues had come in at $740m, up 30% year-on-year, while quarterly subscriber revenues jumped 59% to $555m. However, operating margins nosedived from 12% to a loss of 2%, while it swung from a $160m profit in the year-ago quarter to a loss of $31.1m..
Despite this, CEO Mike Cannon-Brookes described the three months ending 31 March as “yet another strong quarter for Atlassian”. On the earnings call, co-founder Scott Farquhar pointed out that this wasn’t Atlassian’s first recession — “we came out stronger on the other side of that, and we grew through that downturn as well”.
Atlassian’s strengths include its diverse client base — no single client accounts for more than 5% of revenues — and its focus on R&D, which allows it to improve products for customers. In Q3 2022, spend on R&D came in at $363.7m, up from $244.1m a year earlier.
Salesforce expands into new software areas
Shares in Salesforce have fallen 47.8% in the past six months (through 19 May). The stock was hovering just above its 52-week low of $154.64 a week earlier and could see further downward pressure.
Indeed, a number of analysts have downgraded the stock in recent days. Wells Fargo lowered its price target on the stock to $225, while Wedbush decreased its own target to $275 from $315. Despite reducing their growth expectations, though, analysts do still consider the stock to be a good target for investors, with Canaccord, Mizuho and Goldman Sachs among the 36 analysts to have given Salesforce a buy rating, according to MarketBeat.
Following the coronavirus pandemic, firms are still continuing to ensure that they can operate in a remote-hybrid fashion, meaning that Salesforce is likely to retain and expand the number of customers using its subscription products. It has also been expanding into other software areas that are seeing strong demand, such as ecommerce and programming tools for the public sector.
When Salesforce announced its fiscal Q4 results in March, it said that revenues for the quarter were up 26% year-on-year to $7.3bn. This was in line with the full-year figure, which came in at a record $26.5bn, up 25% year-on-year. The company also raised its revenue guidance for full-year 2023 from $32bn to $32.1bn.
Salesforce's full year revenues for FY22, a company record
Robust earnings lift ServiceNow stock rating
While the majority of SaaS stocks have been stuck on a downward spiral, ServiceNow’s most recent financial results have given investors a reason to come back to the stock. Its 19 May closing price of $426.76 is up 5% from its 52-week low of $406.47 on 12 May.
A decent set of results announced on 28 April has helped to boost the ServiceNow share price. It announced that sales had come in at $1.72bn, with earnings per share of $1.73, compared with analyst expectations of $1.7bn and $0.23, respectively.
The company also said that demand for its cloud computing products remained strong, with obligations of $5.7bn on the books, up 29% from the previous year.
According to MarketBeat, 27 analysts hold a ‘buy’ rating on the stock, and just three recommend it as a ‘hold’ or ‘sell’. The average price target of $657.57 also represented a potential gain of 54.1% compared with the 19 May closing price.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.