It’s a nasty day to own stocks as global markets fell in the wake of rising trade tensions between the United States and China. And while the larger U.S. public market fell in early trading on Monday, a key portion of the technology sector took an extra pounding.
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Public cloud and SaaS companies, which have enjoyed a massive run-up in value in recent years, have fallen more sharply than tech stocks more generally. These recent price changes could slow the IPO pipeline, and possibly reprice private rounds into related private companies.
However, what’s notable in today’s down market is the sharpness of the retreat and the lack of positive news on the horizon. As analysts react to China’s reaction to America’s recent tariff threat, it appears that things could get worse before they get better. Thinking narrowly to certain tech shares, the situation could limit short-term upside to stocks valued more on growth than profit fundamentals.
The market pain is not evenly distributed. At the time of writing, the Dow Jones Industrial Average and the S&P 500 are each down about 2 percent. The Nasdaq is off around 2.7 percent. And the Bessemer-Nasdaq cloud index of SaaS stocks is off 3.9 percent.
The damage is similarly varied as we zoom out. When we compare the Nasdaq and the Bessemer cloud index to their recent highs (also their 52-week highs, and all-time highs, for those keeping score), the Nasdaq is off 6.6 percent. That’s a steep decline in just a few trading sessions. However, cloud stocks in the Bessemer-demarcated basket are off a sharper 10.3 percent.
In stock market terms, a 10 percent price change is called a correction. SaaS and cloud stocks are, therefore, in correction as of today compared to their recent highs.
From Highs, Lower Highs
It’s perhaps not panic time yet for cloud and SaaS companies who are public, and therefore not yet time for alarms among their private-market comps.
Why? Because SaaS and cloud stocks are trading at record highs, and at record valuation multiples. Indeed, as of the time of writing, Bessemer itself still notes on its website that the stocks that make up its index are trading for historically high revenue multiples:
That’s still more than healthy. Indeed, when it was 10x, that was quite robust. Even, I’d argue a 9x enterprise value (EV) revenue multiple would be strong. Shifting a lot of stocks from an 11x average to a 9x average would involve pain, but the market would still be healthy for SaaS and cloud companies.
So what we’re seeing today is a correction, yes, but from very, very good to merely very good. If the declines continue, however, the situation could go from worrisome to bad quite quickly. And for private companies looking to defend their valuation and raise more money, neither situation is good. You don’t want market doubt when your valuation is illiquid.
Illustration: Li-Anne Dias.