Cloud Giants Plan Next Move After SaaS Shakeout

SaaS companies have outperformed the broader stock market over the past decade, but a sharp downturn over the last six months has investors questioning the sector’s future.

Valuations for software-as-a-service firms have taken a hit, prompting some to dub the recent decline the “SaaSacre.” The drop is significant. An index of emerging cloud companies managed by Bessemer Venture Partners, known as EMCLOUD, is down nearly 40% over the last six months. This compares unfavorably to the 10% loss seen across the Nasdaq.

VC firms have long favored SaaS investments because of their ability to scale quickly and generate recurring revenue. Companies are often evaluated based on enterprise value-to-revenue ratios, which prioritize growth above all else. This metric frequently requires firms to burn through large amounts of capital to expand.

Why the drop?

Janelle Teng, an investor at Bessemer Venture Partners, identifies two primary drivers for the decline. The first is economic pressure. High inflation and rising interest rates make future revenue projections less valuable to investors. The second is geopolitical instability, specifically regarding the future of the technology sector in Russia.

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However, the inverse correlation between interest rates and EMCLOUD performance Teng observes applies to non-cloud companies as well. High interest rates generally lower stock prices across the board. While some SaaS firms are exiting Russia, the country accounts for only 1% of global technology spend. Therefore, the geopolitical factor likely plays a smaller role in the broader market decline than economic factors.

The SaaS selloff has not affected every sector evenly. Teng notes a divergence in performance. Cybersecurity companies lead the pack in both realized and projected revenue growth. Conversely, EdTech companies rank last in both categories.

This divergence can be explained by efficiency scores. These measures track how much growth companies achieve compared to their capital burn. Cybersecurity firms have grown much more efficiently than those in EdTech. Spending money to generate revenue is only effective if the company actually turns a profit.

Looking ahead

Investors are currently debating whether the current selloff is a correction following the explosive growth of 2020 and 2021, or a sustained trend. Alternative data offers a mixed signal. Job listing data from Thinknum indicates that many SaaS companies are still planning for growth despite falling stock prices.

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This sample of companies represents the full range of the market, from high-flying names like Cloudflare, Datadog, and Snowflake to lower-tier firms like Yext and Sumo Logic. Companies with higher forward revenue multiples are showing significant increases in job listings. Snowflake, for instance, has 932 listings compared to just 216 at the start of 2020.

However, companies with lower forward revenue multiples show indications of reduced job listings. This supports the argument that the selloff is not impacting all companies equally. Similarly, LinkedIn data tracked by Thinknum shows that most companies aren’t seeing major declines in headcount, though a few outliers have seen over 30% growth during the downturn.

While declining stock prices may delay planned IPOs or reduce venture capital valuations, the data suggests that many SaaS companies remain focused on expansion. The sector has not yet shown signs of a complete halt in business activity, leaving room for continued investment in 2022.