Will our SaaS stocks survive the onslaught, the Pandemic, the Armageddon? There is at least one way SaaS companies can be severely affected by beta factors such as Covid-19 and other unknown ebbing tides. As VP of Finance, I helped take a company public in the year 2000, ostensibly the first SaaS company and before we interpreted the word “Cloud” as we do today. All in we raised about $180m in the IPO in July 2000. We hosted software applications for companies including Oracle, PeopleSoft, Siebel, and a handful of other software companies. We had redundant server farms, teams of IT workers, and our company offered and managed the above software company’s software offerings remotely (after partnering with those companies, of course) whose regular customers (at the time) typically would install onsite, have their own servers and their own IT teams in house, yep, every company’s cap ex and headcount spend was ridiculous to have everything in house behind firewalls…the old school way (I.e. every one does it for themselves). We had 1-3 year contracts to host for them remotely, deferred revenues, recurring revenues, the whole shebang. What happened? Well, 50%+ of our customers went under (bankrupt) in the dot.com crash in a matter of 6 months and we never saw those contract revenues. Those defunct customers had little or no revenue, no earnings, not much cash and no path to profitability, as was a sign of the times. They were barely companies and most were not even public yet. Frankly it’s hard to believe some were public companies. We survived due to our strong balance sheet (cash is king) and quick action to downsize our headcount and try to stay profitable, but it was absolutely brutal laying off half the company. I eventually left myself to take a CFO position at another public company in the valley, and the company I’d taken public was sold about a year later to IBM, but not before the stock swooned from a high around $21 all the way down to $1.90 with every other tech company of the time. Stupidity of the day is that we (the company) were worth more per share in cash (but poison pills and the times, etc prevented someone buying us easily….was a crazy period)!! I now have a stock portfolio of 10 of these SaaS companies. They are up several hundred percent the past 3 years. While the market is now down 22% YTD, the portfolio is still up 5%. Today is but a blip and I am not selling them. The advantage today is that all of these SaaS companies are much more established and have large numbers of Fortune 1000 companies as their customers. 50% of their customers are NOT going out of business this time around. Some will, of course…smaller customers perhaps if this madness continues long enough, and that could impact the 10 growth companies that I own in the short-term, but most of their customers, especially the large ones, will survive and (as already discussed) many existing and established large companies and all new companies will eventually adopt SaaS (if they haven’t yet) and become their customers also…Else they will not be able to compete with smaller, nimble fast growing players. So yes…our SaaS companies fundamentals could be affected short-term (ST), but on a much smaller scale, and the stock price could get thrown out with the bath water, ST as exemplified today, but that will be my/our advantage to pick these up on the relative cheap. I just don’t see a repeat of that first company I took public (different world, different circumstances)…but I sure learned a ton from helping build it and living through the Armageddon of that time.
For what it’s worth, I nibbled on more AYX, CRWD, OKTA and ZM this morning at the lows. Watched ZM scream from $102 back to $114 in about an hour!! Wicked volatility!! Love the opportunity!! Stay healthy!! Wash your hands! Be grateful for all you have! Cheers!!
User comment: Hi Victor, it’s impressive the portfolio is still up. Here is my question: What would need to happen so you would sell?
Victor’s comment: Fair question….When do I sell? Only If and when something is fundamentally wrong with the COMPANY fundamentals. I’ve outlined the reasons in past texts why I sold NVDA, TWLO, ZS and others over the past three years. I don’t sell on market news, except to raise a 10-20% cash from those companies in the portfolio growing slower or not as robust. I might trim positions, sell companies I am already considering selling for fundamental flaws, or simply to raise cash with a sale to invest in a higher growth, more fundamentally sound company…ie switching to a faster horse. Like 2000, 2008 and 2016…I believe (and have experienced it personally) that we will look back on this stock market correction the last week and realize it was overdone and overhyped…the virus, the sell off and the media blitz. All that said, it doesn’t mean I don’t have sufficient funds set aside to wait it out a few years in order to realize the true value of the fundamentally sound companies in which we’ve invested. It is hard to do…I won’t argue with you there. Days like today test my convictions more than than any in the past because there are so many unknown with the Coronavirus…it could still get worse before it gets better. Pundits on the technical side say it could go down another 7-15%. But selling great companies now would trigger massive capital gains taxes exceeding 50% with CA taxes and would risk missing the potentially fast rebound that will happen when there is a cure, or the virus is under control, and the govt announces QE, rate cuts and other fiscal policies. “The night is always darkest just before the dawn”.
User comment: I am not an experienced investor, but I lie to think I’m good at psychology. I think it’s a good time to sell now and come back at lower her same valuations, and not carry the market risks that are evident. Not wanting to realize losses can be a trap.
