Recession-feared investors keep trimming fastest-growing cloud stocks

Blend co-founder and CEO Nima Ghamsari speaks at the “Earlier Than You Think” conference in New York on October 16, 2018.

Alex Flynn | Bloomberg | Getty Images

Tech investors finally breathed a sigh of relief this past week, as the Nasdaq snapped a seven-week losing streak, its worst decline since the dot-com bubble burst in 2001.

Five months later, 2022 will be a dark year for the tech industry. No one knows this better than investors in cloud computing companies that have been the darlings of the past five years, especially during the stay-at-home days of the pandemic.

Paradoxically, as the economy reopens, growth remains strong and businesses are benefiting, but investors are selling anyway.

Bill Nets, Hybrid lab and Sentinel One Their revenue is still doubling year-over-year at 179%, 124% and 120%, respectively. However, all three are worth roughly half what they were at the end of 2021. The market has hammered the entire basket.

Byron Deeter of Bessemer Venture Partners, an investor in cloud startups and one of the most vocal cloud stock commentators, observed earlier this month that the firm’s BVP Nasdaq Emerging Cloud Index’s revenue multiple has down to 2017 levels.

profit, please

One of Deeter’s colleagues at Bessemer, Kent Bennett, isn’t sure why the fastest growers haven’t passed the cloud category cuts. But he has an idea.

“You can definitely imagine a moment like this where it goes from revenue to ‘Oh my God, get me out of this market’ and then returns to efficiency over time,” said Bennett, a member of the restaurant software board of directors of the company. toastThis in itself shows that 90% growth in the first quarter. The stock is down 52% so far this year.

Toast Disclosure Revenue fell in 2020 The decline in in-person restaurant visits has resulted in less frequent use of the company’s point-of-sale hardware and software. Then online ordering takes off. CEO Chris Comparato said in an interview with CNBC earlier this month that now that people are increasingly eating again, Toast has seen its Go mobile point-of-sale devices and QR codes Demand is even stronger for devices that allow people to order and pay on their phones. .

Now that the company has recovered from its Covid woes, investors are telling the company to “paint a better path to profitability,” he said.

Management told all teams to work very hard to understand their unit economics, but Comparato said he wasn’t ready to tell investors when the company would break even.

Toast provides new information about profit. On Toast’s first-quarter earnings call earlier this month, Treasurer Elena Gomez said its interest, taxes, depreciation and amortization in the second half of 2022 was due to the company Pre-profit will be 2 percentage points higher than the first half. Committed to improving profit margins in the future.

“Some investors pushed, of course they wanted more details,” Comparato said. “But a lot of them were like, ‘Well, that’s a different tone, Chris, thank you. Chris and Elena, please continue to execute on that vision.'”

Other cloud companies have also received information.

Data Analysis Software Maker snowflakeJust wrapped up two-and-a-half straight years of triple-digit revenue growth, and it’s “not a growth-at-all-costs company,” CEO Frank Slootman Announce on a conference call with analysts on Wednesday.

ZuraThe company that provides subscription management software “is focused on building a successful long-term company with durable and profitable growth for years to come,” CEO Tian Zuo said on the company’s quarterly analyst call.company report Revenue was $93.2 million and a net loss of $23.2 million compared to a loss of $17.7 million a year earlier.

Back to the “Rule of 40”

Even in the broader software industry, the old-fashioned view that software should make money is being re-admitted. Splenkwhose software helps enterprise security teams collect and analyze data, includes a slideshow Introduction of its shareholders Known as “Growing Profitability at Scale”. It charts Splunk’s performance over the past few years versus “Rule of 40“The concept dictates that the company’s revenue growth rate and profit margin should add up to 40%. Splunk is calling for 35% this fiscal year, the closest it’s come in three years.

Bill.com isn’t completely de-emphasizing efficiency, its software helps small and midsize businesses manage bills and invoices, but that’s easier to overlook because revenue is growing much faster than most businesses. Even before the software sell-off in November, executives touted the company’s healthy unit economics.

Blend Labs, which provides banks with software that can be used in mortgage applications and other processes, is more aggressive in repositioning for new market realities, but it’s also one-seventeenth the size of Bill.com by market capitalization.

Despite enjoying high growth, Blend cut headcount by 10% in April. The company’s co-founder and head, Nima Ghamsari, told analysts that the company is conducting a “comprehensive review to align our cash consumption with near-term market realities, while laying out a clear path to improving product and operating margins, which is expected to align our cash consumption with near-term market realities. Will result in long-term profitability for Blend.”

SentinelOne, which sells cybersecurity software that detects and responds to threats, has been busy researching its cost structure. Co-founder and CEO Tomer Weingarten, who turned analysts’ attention to its margin improvement on a March conference call, said the company aims to make more progress next year.

Those comments, and the overall better-than-expected results, were well received by analysts. But regardless, many still lowered their price targets on SentinelOne stock.

“While we raised our growth forecast for S, we lowered our PT to $48/share entirely due to a reduction in the software multiple,” analysts at BTIG wrote in a letter to clients. Categories are crushed, and SentinelOne is not immune.

Until then Wisdom Tree Cloud Computing FundThe exchange-traded fund (ETF) that tracks the Bessemer index is down 47% from its Nov. 9 high. The decline did not stop as the Fed reiterated its plan to fight inflation by raising interest rates.

This has cloud watchers wondering when the downward pressure will ease.

“It will take us a couple of months to get through this,” said Jason Lemkin, founder of SaaStr, a company that hosts cloud-focused conferences. “He likened the recession to a hangover after Covid got investors hooked on cloud stocks.” Haven’t passed our Bloody Marys and aspirin yet,” he said.

The two biggest heroines in the Covid cloud set, Shopify And Zoom Video Communications, where last year’s triple-digit growth disappeared as stores began to reopen and in-person social events began to return. If anything, it’s that investors should be aware that the demand boom has largely passed, Lemkin said.

“We’re reverting to the mean,” he said.

Resets may not be uniform, though. Another Bessemer investor, Mary D’Onofrio, said cloud companies that follow the Rule of 40 have far better revenue multiples than those that don’t. Companies with free cash flow margins above 10% today also enjoy higher multiples, she said, and investors fear a recession.

“The market has turned to cash being king,” Donofrio said.

— Ari Levy of CNBC contributed to this report.

watch: Tech will see marketing budget cuts, slowing hiring and layoffs, says Bessemer’s Deeter