Nikola is to Tesla as Roam is to ?

9/11 OpenView Capital Markets Roundup

There is no difference between short selling (or taking a long position in) Nikola and joining a syndicate to invest in Roam Research (generating ~$1M of ARR) at a $200M valuation.

In both cases investors are making bets on the intrinsic value of each company, and intrinsic value is in the eye of the beholder. Hindenburg Research, which this week published a scathing report detailing alleged Theranos-level fraud at Nikola (the pre-revenue, pre-product electric truck company that went public via SPAC earlier this year) made a bet that the value of the company is less than the current market price and shorted the stock. Investors in Roam, who this week announced they inked a deal at a $200M valuation capitalizing on the “frenzy for note taking apps” made a bet that the intrinsic value of a $1M ARR horizontal software business is at least $200M (but hopefully as much as $1B to 5x their capital). Both are bets and both uncertain, but it’s curious to see the SaaS community view the Roam bet as rational and then without hesitation write off Nikola investors as crazy.

Now, hear me out… if we ignore the fact that Nikola might be a fraud and just look at two business with little revenue and lofty valuations vs. traction…

It is much easier for me to see why the Nikola story is so appealing to so many investors and why the stock has traded as it has in absence of product or revenue (especially with retail investors, a group that Nikola’s CEO has been clear he is targeting as shareholders). The Company was able to take advantage of powerful narratives they didn’t have to create: climate change and the success of Tesla. Nikola has a defined market and customers (as I write this in a car on the highway, I can see all of them: it is anyone needs semi-trucks) and an obvious value proposition (solving the climate crisis and more cost effective than diesel). On the back of Elon Musk’s innovation in electric vehicles (and without much effort) the market has been given much greater permission to believe that Nikola’s trucks are the future. Contrast this to Roam. While I haven’t heard the vision firsthand and even though the product is novel (I’m a happy user), the market opportunity, value proposition, and ideal customers that will take Roam to a $1B+ business aren’t that obvious to me. It is a note taking app – will it become a next-generation Wikipedia? Maybe. But that’s leaps and bounds from where it is today.

The proof that Nikola could a big business (assuming it isn’t a fraud) is all around, not so much with Roam. If I apply historical multiples to an exit – how does Roam get to ~$100M of revenue and exit for 10x revenue? I don’t know, but I see a lot of diesel semis that we can get off the roads!

Market Updates

This week one of the banks in our network shared a great report detailing their outlook for technology companies leading into and following the election. As I’ve noted before, companies are ramping to get deals done before the Presidential election and risks for the TMT space broadly include tensions with China, anti-trust, tax, privacy, national security concerns, and much more. Each of these concerns could be viewed differently depending on how the election shakes out (Democratic sweep, Biden wins with a divided Congress, or the status quo), but per the report software, on average, has historically performed best under Democratic Presidents, whether unified or divided governments. Software has performed poorly under a Republican President with Democrat House. The report notes that for software specifically there are very few policy implications revolving around the election other than anti-trust risk and tax, as performance in software is more about fundamentals both in the software space and the overall economy (a weakening economy has clearly helped software names in the past couple of years as one of the few bastions left of secular growth).

Elsewhere, the markets continued to experience significant volatility with SaaS stocks losing about 5% in a shortened week of trading. I’d encourage everyone to view this as normal volatility as investors process earnings and high prices - nothing more sinister (yet). There is no new fundamental information about companies to parse and earnings were generally solid across the board. And regardless, following the huge melt up in multiples into June, stocks have sat “flat-ish”. Since a new high in early July 9th, stocks have gone up as much as 10.5% and fallen to just above - but never below - that July level. SaaS has traded in a volatile but defined band but the lack of continued appreciation recently is curious, but likely healthy. It was a turbulent week for the markets. Key indices finished the week down significantly: SaaS -6.22%, Dow -2.22%, Nasdaq -5.81%, and S&P -3.30%.

Economic Data

The short story - besides Alan Greenspan raising concerns about inflation and a growing deficit, not much has changed in the economy this week.  

Investors will look to the Fed to soothe the market next week but that may be a tall order according to CNBC. This coming week will Fed will meet for the final time before the Presidential election. This meeting should give insight into the Fed’s outlook for the economy and policy plans. The latter is of high importance to investors as the Fed’s “Fracking” (a term coined by Mark Grant to describe the process of injecting money at high pressure into Treasuries, Corporates, ETF’s, Municipals High Yield etc. so as to force yields down for all risk assets and extract lower interest rates for the government) continues to have an impact on asset prices. The market will want to know: will it continue and at what level? This will also be the first view into the Fed’s interest rate policy for 2023, which is expected to be dovish.

What Else We’re Reading

The public SaaS companies we track closed the week trading at 12.0x 2020E revenue at the median (-0.5x vs. 12.5x last week). New stock exchanges launch to compete for your dollar.The multi-disciplinary approach to thinking. The three sides of risk. In honor of the Nikola short Einhorn’s “Fooling Some Of The People All of the Time, A Long Short Story.”