Cloud stocks plummeted as investors were dissatisfied with the pandemic’s best-performing stocks

On Wednesday, September 30, 2020, during the initial public offering (IPO) of the former company on the New York Stock Exchange (NYSE), pedestrians wearing protective masks passed before the banner displaying the Asana Inc. logo.

Michael Nagel | Bloomberg | Getty Images

In the past five years, cloud software has been one of the best choices for investors. But this kind of transaction has recently been quickly lifted.

The recession that began in November and deepened this week was partly a market rotation, partly because the economy reopened from the pandemic, partly because of concerns about the Fed Expected interest rate hike Will have a huge impact on this particular field.

For many years, cloud computing services have always been a leader in the field of technology, and the performance of technology itself has outperformed the market.Since the creation of Bessemer Venture Partners BVP Cloud Index Among the listed companies in August 2013, the basket of indexes rose by 909%, almost three times the increase of the Nasdaq index and five times the performance of the S&P 500 index.

Coronavirus disease It turns out that this is a huge boon, as companies, schools, and government agencies have accelerated their transition to the cloud so that they can access remote communication, collaboration, and storage tools.E-commerce software provider Shopify, Video chat service Skyrocket And electronic signature provider Document signature Is one of the big winners, all companies have achieved substantial revenue growth in 2020, and stocks have risen to triple digits.

Those software-as-a-service or SaaS stocks are obsolete.Although traditional computer and printer manufacturers Hewlett-Packard Company Set a new high, the Dow Jones Industrial Average fell only slightly this year, and the darling of working from home suddenly entered a bear market.

Both Zoom and DocuSign are down more than 50% from their 52-week highs, and Shopify is down 34%. Posture It was the best-performing US technology stock before mid-November last year.Suppliers of project management software include Since lost 58% of its value.

Cloud stocks, an index, are down 29% from their November highs.

Byron Deeter, a venture capitalist who invests in software start-ups in Bessemer, said on Tuesday that the market’s “Christmas sale discounts on cloud stocks have fallen by 30%.”

“In general, the cloud computing industry and software have just been hit hard,” Dieter told CNBC’s “TechCheck”. “Fundamentally speaking, these businesses are still the driving force of the new economy. We must remember all the trends that people were excited about the 2020 market a year ago when the return rate of this basket was almost 100%. These trends still exist today. .”

Higher interest rates Can spell a challenge For most markets, they represent a clear obstacle to cloud stocks, especially for companies that have not yet made money. Investors value the company based on the present value of future cash flows, and higher interest rates will reduce expected cash flows.

Minutes of the Fed’s December MeetingThe report released on Wednesday further spurred investors who are adjusting their investment portfolios for rising interest rates, as the central bank prepares to recoup the loose monetary policy during the pandemic.

The WisdomTree cloud computing fund fell 6% on Wednesday, and as of Thursday’s close, it has fallen 10% this week. The index is in its second worst week since the pandemic began, and the only decline was about a month ago.

“I think SaaS has generally fallen because of rising interest rates, and there is often a very close correlation between high-growth software and interest rates,” said Chief Operating Officer Khozema Shipchandler. Tviglio, Selling back-end software for communication.

Although earnings and revenue exceeded expectations each quarter, Twilio’s stock price has fallen 46% from its high at the beginning of last year. Sales in the third quarter increased by 65%, and its cash and marketable securities climbed from $3 billion at the end of 2020 to $5.4 billion.

“I’m not worried,” Shipchandler said of the stock price. “I have $5 billion in cash on my balance sheet. I know I can survive basically in any cycle.”

Investors in this field have also seen the same thing.

“I do think this is a buying opportunity,” said Nina Achadjian, a partner at Index Ventures, who was Google“The fundamentals of these companies have not changed.”

Sustained revenue growth coupled with plummeting prices meant that the sales multiples paid by investors were compressed. According to the BVP index, in February last year, the average expected return on cloud stocks was 16 times. It is now 10, the lowest level since May 2020.

According to FactSet’s data, Zoom’s transaction price is 14 times, which is lower than the peak of 189 times. DocuSign has a multiple of 15, falling back from the high of 50.

Although not every cloud provider has a cash buffer from Twilio, Zoom, or DocuSign, many companies in space have high software margins and are driven by subscription businesses that continue to show strong retention rates.

“These are models based on cycles,” said Michael Trin, an analyst in charge of cloud computing companies at Wells Fargo. “They are very knowledgeable about the underlying business model.”

Translating these fundamentals into good investments may require patience. From 2017 to 2021, the Nasdaq Index beat the Dow Jones Index every year. In the first week of 2022, the Dow Jones index barely maintained a slight increase, while the Nasdaq index fell 3%, and cloud stocks were hit hard.

— CNBC’s Ari Levy contributed to this report.

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