It's been a challenging year for software-as-a-service (SaaS) stocks like Atlassian, DocuSign and HubSpot. A challenging macro environment has weakened investor sentiment, with headwinds likely to persist into next year. A "fundamental shift" in SaaS is reportedly reducing market caps.
- Research firm New Constructs adds Atlassian to a list of stocks that could fall to $0 per share
- Atlassian reported slowing free-to-paid conversions in the third-quarter
- The WisdomTree Cloud Computing UCITS ETF holds Atlassian, DocuSign and HubSpot
Atlassian was the target of a critical report by New Constructs at the start of December. David Trainer, CEO of the research firm, has added it to his list of "zombie stocks" — those he expects to fall to $0 per share.
Significant cash burn and limited cash in the bank mean Atlassian faces several challenges. "The company has burned through $838m in free cash flow, excluding acquisitions, since its fiscal first quarter of 2021," wrote Trainer.
Atlassian has refuted the suggestion that its valuation could fall to zero. A spokesperson told MarketWatch that it "continues to generate positive free cash flow quarter over quarter while investing purposefully in creating value for our customers and scaling to become a 100-year company."
The Atlassian share price is down 63.5% year-to-date but up 17.2% in the past month. The DocuSign share price is down 64.4% and up 18.1% for the respective periods, while the HubSpot share price is down 56.4% and up 5.5%.
Still reeling from the freefall
All three stocks have been recovering from 52-week lows across October and November.
The Atlassian share slumped after warning on its first-quarter 2023 earnings call in November that the rate at which users were converting their free trials into paid subscriptions was slowing. This slowdown is also having an impact on the company's pace of hiring.
While HubSpot reported subscription revenue growing 32% year-over-year in the three months to the end of September, deals are taking longer to close due to the challenging macroeconomic environment, forcing enterprises to rethink their spending. The company expects these headwinds to have persisted in the fourth quarter (Q4).
DocuSign surprised with its third-quarter numbers reported in early December, beating analyst expectations. However, while billings — new business secured during a quarter — were up 17%, they're expected to slow dramatically to between 5% and 7% in Q4. Growth for 2024 is forecast to be in the low single digits.
Macro headwinds set to persist
Sluggish growth is likely to apply pressure to the Atlassian, DocuSign and HubSpot share prices in the near term, despite recent rallies.
As Janelle Teng, vice president at Bessemer Venture Partners, explained in a November blog reposted by WisdomTree, macroeconomic headwinds have been causing valuations to reset this year.
"We are now seeing a full-blown macro impact on fundamentals that investors are starting to react to. An example is Atlassian, which noted in its recent communication of quarterly results that 'last quarter, we shared that we saw a decrease in the rate of free instances converting to paid plans. That trend became more pronounced in Q1' and 'this quarter, we started to see a slowing in the rate of paid user growth from existing customers,'" wrote Teng.
She argued that a "fundamental shift" is taking place in the SaaS sector. Once the dust has settled, there will be fewer cloud companies with over $10bn market caps.
Fund in focus: WisdomTree Cloud Computing UCITS ETF
The WisdomTree Cloud Computing UCITS ETF [WCLD.L] offers exposure to all three of Atlassian, DocuSign and HubSpot. The stocks have weightings of 0.89%, 1.38% and 1.36%, respectively. The fund is down 52.4% year-to-date and flat over the past month.
The Direxion Work From Home ETF [WFH] holds Atlassian and DocuSign, with weightings of 1.81% and 2.95%, respectively. The fund is down 45.2% year-to-date and down 4% in the past month.
The Harbor Disruptive Innovation ETF [INNO] holds both Atlassian and HubSpot and has allocated them weightings of 2.3% and 0.9%, respectively. The fund is down 44.7% year-to-date and down 3.2% over the past month.
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