6/19 OpenView Capital Markets Roundup

The dog is buying stocks

Occam’s Razor is the principle that “entities should not be multiplied without necessity.” In other words, the simplest explanation is the right one. So no, the dog didn’t eat our homework - we just didn’t do the homework.

In the current environment there has been a new Occam’s Razor explanation for the frothiness across seemingly every asset class presented on a nearly daily basis. On Monday it is retail traders on Robinhood. Tuesday it is Citadel’s algorithms front running that same order flow and magnifying individual trades. Wednesday the answer is liquidity from the Fed (Powell and team started buying corporate paper this week, which has a downstream impact on equities). Thursday the old “reopening the economy vs. second wave” dialogues bubble to the top. And on Friday it is either narrow breadth or the Trade War that is responsible for moving the market. There are undoubtedly some very, very weird things going on but each of the aforementioned hypotheses falls down in some way. Can a few hundred thousand retail traders with limited assets and one hedge fund really be sending prices to the moon?

In “The Black Swan,” Nassim Nicholas Taleb writes about the Triplet of Opacity, (1) we think we know what is going on, but the world is more complicated than we realize, (2) we can assess matters only after the fact (history is more organized in the rearview), and (3) we overvalue the factual. So while it is convenient to lay blame for the melt up on any of the above the real Occam’s Razor is that no one really knows what they’re talking about at present. Humankind has never experienced the impact of a pandemic on a globalized economy engaged in real time information processing that is simultaneously experiencing hugely important social and civil movements.

We’ve found a new way to communicate each week that there is a lot to like about the public SaaS companies we follow (high returns on capital, strong industry tailwinds) but less to like about their stocks as of late (all-time highs set daily). And while it is true that from a fundamental analysis perspective asset prices don’t make sense, it is also true that someone agreeing with our sentiment each week would have missed incredible investment returns over the last several months. The Triplet of Opacity is at work. As Taleb writes, “…almost all who cared seemed convinced they understood what was going on. Every single day brought occurrences that lay completely outside their forecast, but they could not figure out that they had not forecast them. Much of what took place would have been deemed completely crazy with respect to the past. Yet it did not seem that crazy after the events.”

Surely in five years we’ll have a neatly packaged story for 2020 - but for now the only certainty seems like more uncertainty.

Financial Resources

409a Valuations

Any negative impact to financial performance often means an impact on company valuations. It is likely that private companies of all stages have seen some impact from COVID and as such, some companies are questioning if they should re-price options issued prior to the crisis. We’ve gathered from recent discussions that impact from COVID alone shouldn’t be a catalyst for repricing. Only if performance will meaningfully degrade long term (1+ years) does it make sense to look at a new 409a. Assuming board alignment, companies must still use an independent 409a valuation firm. If the result means some options are underwater companies have flexibility to unilaterally reprice options or offer an exchange program. Note though that both of these avenues must be carefully reviewed so as to comply with any and all equity plan, securities, and tax laws. We encourage companies to consult with counsel before considering.

Capital Markets Resources

Market Updates

The public SaaS companies we track collectively hit new all-time highs this week and seemed poised for a 2018-style sell-off should some small catalyst like the negative dialogues around trade or COVID cases spook investors. All key indices finished the week up (SaaS +8.31%, Dow +1.04%, NASDAQ +3.57%, S&P 500 +1.86%).  

Economic Data

This week CNBC noted that economic data is “uneven”. The uneven data referenced were the new jobless claims number in particular (compared with continued positive trends in other key data each week like Fed activity as well as business and consumer sentiment). While the jobless trend had been positive at the end of May this week another 1.5M US workers filed for unemployment for the first time. It is looking certain that the economy will need another direct stimulus to support workers but Congress remains divided on what that should look like and is on recess until late July.

What Else We’re Reading

SaaS valuation multiples opened the week lower at 10.7x (vs. 12.1x) 2020E revenues at the median but closed the week up at ~13.0x 2020E revenues at the median. How stocks are performing in 2020. How the Fed Became a Bubble Machine for Equities.