Wall Street SaaS Panic: A Misguided Reaction

The Disconnect Between Wall Street and the Tech Industry

It’s often perplexing to consider whether analysts on Wall Street, despite their intelligence, fully grasp the dynamics of the technology sector.

A recurring misconception among investors is that companies which thrived during the pandemic, such as Zoom, DocuSign, and Okta, will experience a decline in relevance as the pandemic wanes – assuming it ever truly ends.

These are the same analysts who enthusiastically promote a stock one month, only to divest from it the next when growth projections become more grounded, despite understanding that sustained pandemic-level growth is unrealistic for any organization.

The Enduring Nature of Digital Tooling

I don’t intend to offer financial guidance, but it’s important to recognize that digital tools aren’t a temporary trend. The cloud isn’t a fleeting phenomenon.

It represents the future of work, the future of computing, and any processes not yet digitized will inevitably be transformed in the near future.

The core question remains: why do investors struggle to comprehend this and correlate it with the short- and long-term performance of Software-as-a-Service (SaaS) stocks?

The Cloud Ecosystem: A Growing Market

The cloud ecosystem is comprised of three primary components – infrastructure, platform, and software – all delivered as a service.

Data from Synergy Research indicates that the entire cloud ecosystem expanded by 25% in the first half of this year, reaching a total of $235 billion.

Most organizations now acquire software from providers like Salesforce, Okta, Box, Dropbox, DocuSign, Workday, and ServiceNow, which handle management and provide automatic updates.

Cloud Deployment Options

For those with specific requirements, software can be installed on a chosen cloud infrastructure or developed using platform services and then deployed using infrastructure services.

The optimal approach depends on various factors, but the overarching trend is a continued migration towards the cloud.

As Amazon Web Services (AWS) CEO Adam Selipsky highlighted during his keynote at AWS re:Invent, only between 5% and 15% of workloads currently reside in the cloud.

This signifies substantial growth potential for an industry already operating at a $180 billion annual run rate, with no indication of slowing down.

Wall Street’s Focus on SaaS Companies

However, Wall Street’s primary concern centers on SaaS companies, the software businesses built on top of AWS and other public clouds.

When Zoom experienced rapid growth during the pandemic, fueled by the shift to online platforms for education, religious services, and remote work, investors took significant notice.

The company’s stock value was inflated to an extraordinary level, reflecting the unprecedented pandemic-driven growth it achieved.

Zoom recorded five consecutive quarters of triple-digit growth, peaking at 369% in the March 2021 earnings report (Q4 2021).

The Inevitable Correction

Investors, anticipating perpetual growth, drove the stock price to $559 per share in October 2020, before a subsequent decline.

Currently, the stock trades around $184 per share – a substantial decrease.

Did Zoom lose its popularity? Was there a sudden decline in the need for video conferencing? Certainly not.

Zoom remains widely used, and the company is actively diversifying its offerings beyond video conferencing.

While growth has moderated, it remains realistic, with the most recent quarter reporting around 35% growth on over $1 billion in revenue – a result many companies would welcome.

Maintaining the pandemic-era growth rates was never feasible, but Wall Street capitalized on the surge, witnessed its decline, and subsequently expressed dissatisfaction.

Recent Market Reactions

On Friday, DocuSign experienced a staggering 40% drop in its stock value.

Did users suddenly reject digital signatures? Did DocuSign relinquish its market leadership?

As my colleague Ryan Lawler observed on Twitter:

https://twitter.com/ryanlawler/status/1466819947242393604

And as I responded:

The decline wasn’t triggered by a poor earnings report; in fact, the company reported $545.5 million in revenue, a 42% year-over-year increase.

However, similar to Zoom, Wall Street had inflated the stock’s value based on pandemic-driven growth and reacted negatively to slowing growth – not negative growth, not significant losses, simply a slower pace.

Investors panicked and began selling off the stock.

The Herd Mentality and Fundamental Value

Let’s not overlook the herd mentality, the tendency for investors to simultaneously attempt to sell their shares.

Few paused to assess whether the company’s fundamentals had deteriorated since the previous day’s earnings report.

Were there any warning signs beyond the slowing growth, this notion that continuous, accelerated growth is essential for value?

Reasonable growth, profitability, and the expectation of continued success should indicate a sound company.

Broader Market Trends

This pattern repeated itself last week with Salesforce and Okta also experiencing stock drops.

Interestingly, Box, a company often criticized by Wall Street, performed well after reporting its third consecutive quarter of revenue growth.

Although the growth rate of 14% was lower than Zoom’s 35% or DocuSign’s 42%, the continued upward trend seemed to reassure investors.

Concluding Thoughts

Wall Street will continue to operate as it does, and typically generates profits in the long run.

However, it’s worth questioning why moderate growth, rather than explosive growth, can trigger investor anxiety.

This was evident last week, and it’s likely to recur, as even positive results may not be sufficient for some investors.