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5/29 OpenView Capital Markets Roundup
The X's and O's of SaaS
If you bought Workday right after IPO and held through today, you’d be sitting on 18.7% IRR and a 2.7x gross multiple of invested capital—buying SaaS equities after IPO and holding long term is foolproof.
Permabull investors point to Workday as their overwhelming proof that SaaS is a guaranteed successful long term investment. But “long term” is an undefined phrase. In the age of algorithmic and high-frequency trading a week could be considered long term. Conversely, per Michael Burry in the early 2000s, “…[I] recommend that members of this investment vehicle judge my performance over a period of five year or greater… this will prove to be the most fruitful and enjoyable manner in which to participate in the fund.”
A 5+ year horizon is idealistic considering that management teams report (are judged) quarterly, which anchors even the longest term investors in 3 month intervals. Not even Burry was immune to investor redemptions in the year leading up to the great financial crisis despite his repeated pleas to be benchmarked over 5+ years. Regardless of what “long term” means to different investors, the expectations framework can inform potential outcomes—Workday is the perfect example.
If you bought Workday stock at a 30x revenue valuation with a five-year hold in mind shortly after its 2012 IPO, you’d have had a great 2013 (+50%) but then the stock would have sat flat in your portfolio in 2014, 2015, and 2016. Over that same period, though, Workday grew revenues at a 55% CAGR (between ’12-’16).
Workday is the bear case for buying SaaS equities right now—crazy expectations can lead to disappointing stock results, despite growth and an amazing business. Long-term investors piled into Workday but their expected results were priced in 5 years ahead of time and the stock didn’t budge. As we noted last week, the prices investors are paying for SaaS stocks today imply crazy expectations and as a result, we could see an extended period of flat returns for the best companies over the “long term.”
Today, Shopify is further evidence of expectations at work. In early March Shopify’s SMB customer concentration made it reasonable to assume there would be adverse financial impact from COVID and the stock traded down nearly 40% from all time highs (vs. ~35% for the broader SaaS index). But through highly visible offensive and defensive initiatives—an endless list of announcements, CEO Tobi Lutke touting that “we’re the rebel army to Amazon’s web empire” and business development work (partnership with Facebook)—Shopify has continued to accelerate the treadmill despite no change in the fundamentals of the business.
As you might expect, Shopify closed last Friday trading 156% above it’s March low. But any company can be like Shopify! Now that the “tactical dust” has settled post-COVID scenario planning, executives can shift their focus to strategic initiatives that accelerate expectations and increase equity value.
This week on OpenView’s BUILD podcast, Kieran Flanagan, VP of Marketing and Growth at Hubspot, joined to discuss the importance of Operations roles in a product-led model, the shift occurring today in B2B marketing, and how cross-functional teams are the organizational design secret to success with product-led growth strategies. Next week, join Dan Rodrigues (founder and CEO of OpenView portfolio company Kareo) on June 2nd as he sits down with Golub Capital to discuss how SaaS CEOs are navigating the COVID-19 environment. Hear directly from Dan and his peers on how today’s environment is changing the landscape for growing software companies. You can register for the webinar here.
Capital Market Resources
It was a relatively quiet week in the markets… until the last minutes of trading Friday when stocks pared losses on reports of no new China tariffs forthcoming. Per our commentary about headline “Mad Libs” last week, this week’s hot topics moving markets were consistent: reopening, news about a fifth relief bill, upcoming and developing macro risks such as protests, high unemployment, case rate decline and potential second waves, the US presidential election, and US/China trade.
Despite ups and downs in the markets throughout the course of the holiday-shortened week of trading, all indices save for the SaaS index finished the week higher (SaaS -1.64%, Dow +3.87%, NASDAQ +2.16%, S&P 500 +2.91%). Overall, stocks ended May with large monthly gains.
This week, we saw improvements in economic data like consumer confidence and increases in home prices. On the former (per Dion Rabouin), “while the Conference Board’s consumer confidence index has fallen by 30 points from its March level, expectations about the next six months in the May survey were 10 points higher than in March. In fact, the expectations index rose to its highest level since September.” While consumer spending (which represents 70% of GDP), has fallen, personal savings have spiked—this paired with data on confidence offers a glass half full narrative for the economy. Also this week Bloomberg reported the highest level of bankruptcies since 2009. Lenders were flexible early in the crisis but debt-laden companies experiencing prolonged slowdown are now feeling pressure from creditors.
What Else We’re Reading
SaaS valuation multiples moved up a whole turn of revenue from 9.8x to 10.8x 2020E revenues at the median to open the week. What the hell, SaaS valuations. PPP loan forgiveness webinar from the NVCA.