MorningWord 1/3/17: SaaSy Stocks

by Dan January 3, 2017 9:19 am • FREE ACCESS

With the New Year comes no shortage of predictions for financial markets for 2017.  My crystal ball is in the shop, but I want to highlight a tech prediction from famed venture capitalist Fred Wilson, founder of Union Square Ventures made on Jan 1st. From his blog:

The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.

What’s interesting about this is that these SaaS stocks dramatically under-performed the broad market in 2016 (Nasdaq up 7.5% & S&P 500 up 9.5%) with (CRM) losing 12%, Workday (WDAY) down 17% and ServiceNow (NOW) down 14%.

The key word in Fred’s prediction is continue. Oracle in November paid $9.3 billion to acquire Netsuite. And CRM seems to be routinely mentioned on both sides of the trade. In 2015 CRM was rumored to be a target of Microsoft to the tune of $55 billion, but CRM reportedly declined holding out for $70 billion. In 2016 MSFT shifted gears a bit an acquired LinkedIn for $26.2 billion, supposedly outbidding CRM. CRM did go on an m&a binge in 2016, acquiring a handful of companies for a combined $5 billion, and passed on a rumored $13 billion bid for Twitter (TWTR) given discontent for such a deal by large investors.

I suspect we continue to see smaller deals. As it appears from CRM passing on TWTR, investors are getting a tad more cautious about how management and boards use their currency and balance sheet to acquire growth. As I highlighted back in early Dec (SaaSafras) regarding WDAY and NOW:

WDAY, a company that has never turned an annual profit, and its f2017 expected eps gain of 2 cents turns into a loss of $2.07 on a GAAP basis (a loss of $415 million). I’d be shocked if ORCL, or CRM for that matter was willing to slap a 20 to 30% premium on WDAY for those sales and those GAAP losses.


ServiceNow (NOW) a $12.7 billion, $1.4 billion revenue cloud services company that also trades 9x sales, with massive GAAP losses (2016 expected adjusted eps of 69 cents which translates to a $2.71 loss!).

I’ll conclude with a simple observation on CRM. There are few $50 billion market cap companies that can claim 25% revenue growth, yet the stock closed down nearly 20% from its 52 week and all time high made in May 2016. CRM is approaching key technical support at the uptrend that has been in place since early 2012:

CRM 5yr chart from Bloomberg

The bull market of the last 7 years has included specific asset bubbles that inflated and popped. Remember 3D printing (DDD, SSYS), web security (FEYE, PANW), wearbles (FIT, GPRO) & internet services (P, TWTR,YELP)? Will SaaS be the tech bubble that popped in 2016-2017?  If m&a does continue it can extend the time period. But it will be fascinating to see what sort of premium companies will be willing to pay. Not to mention the GAAP losses they’re willing to absorb for “recurring subscription revenue streams”.