This is great news for startups seeking capital as 2021 approaches.
What a difference a week done.
This time last week, following earnings from the five largest US tech companies and early results from other software companies, it appeared that tech stocks were in danger of losing their mojo.
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But then this week’s rally was launched and more earnings results came in. Broadly speaking, third quarter numbers for SaaS and cloud companies have been moderately good, or at least good enough to protect historically stretched valuations when comparing current revenue multiples to historical norms.
This is great news for still-private startups that have faced a recession, an uneven and sometimes uncertain funding market, an election cycle, and other unknowns this year. Wrapping 2020 with a market rally and strong earnings from public competitions should give private software vendors a halo as the new year approaches, helping them to both raise cash and defend their valuation.
Of course, there’s still a lot of data to come in, markets are choppy, and many SaaS companies will be reporting next month, with the fiscal calendar a month off from how you and I track the year. But after spending some time on the phone this week with the CEO of JFrog, the CEO of BigCommerce, and the CFO of Ping Identity, I think things are going well.
Let’s go into what we learned.
Growth and expectations
Kick off, Jamin Ball from Redpoint, a venture capitalist who unknowingly moonlights as The Exchange’s research desk during earnings season, has a look at this week’s SaaS and cloud stock-wide earnings results that have is the subject of a report. As you’ll recall, last week we were mildly impressed with his cohort of results.
here is this week’s countdown:
As we can see, there was only one miss among the group in Q3. Unsurprisingly, that company, SurveyMonkey, was also one of three SaaS companies to project fourth-quarter revenue in line with Street expectations. My reading of this chart shows that just under 80% of the group that projected Q4 forecasts that beat expectations are bullish, as did Q3 earnings, which included a fair number of companies that exceeded targets by at least 10%.
Inside the data are two narratives that I want to explore. The first concerns the COVID friction, and the second concerns COVID-19 acceleration. Every business in the world knows at least some of the firsts. For example, even companies experiencing a boom in demand for their products during the pandemic still have to deal with a sales market in which they cannot operate as they would like.
For software vendors, who are said to be in the midst of an accelerated digital transformation, the question is whether or not the downsides of COVID outweigh its upsides. We’ll explore the question through the lens of three companies The Exchange spoke to this week after reporting their third quarter results.
Of our three companies this week, Ping Identity struggled the most; its stock fell sharply after falling from its third-quarter numbers, despite posting better-than-expected earnings for the period.
The company’s revenue fell 3%, while its annual recurring revenue (ARR) increased 17%. Why did its stock fall if it exceeded expectations? You might read its Q4 forecast as slightly soft. In the table above, it is marked as a slight beat, but its moo-end came below analysts’ expectations, creating the possibility of a projected failure.
Investors, betting on Ping’s move to SaaS as both now and long-term accretive, weren’t thrilled with its fourth-quarter guidance.