Cloud Stocks Take a Beating

The market for cloud-based products and services is still fairly immature. SaaS, the most mature of the cloud markets, still only represented around 15% of the software market as a whole in 2015. However, the promise is that this will be the main way companies and consumers buy software in the future, which has led to high stock valuations for some of the leading SaaS and cloud providers over the past 2-3 years as investors vie for a piece of the action.

A number of cloud tech and related tech stocks saw stock values drop on February 5. The biggest news was LinkedIn, which suffered a 43% decline. At the same time, Salesforce.com dropped more than 20%, Workday slid around 15% and ServiceNow was down about 15%. In addition, analytics data visualization software provider Tableau Software saw its stock decline close to 50%. Other less well-known cloud and software stocks, such as New Relic, Zendesk, Qlik, and Demandware, also took similar 10-20% declines in stock value.

These stock adjustments were set against a background of market declines, S&P 500 closed down 1.9%, with its tech stocks falling 3.4%. Nasdaq overall fell 3.3%, with other tech companies also seeing shares shift downward. Apple fell 2.7%, Facebook lost 5.8% and Amazon had a 6.4% decline.

Largely, this decline can be put down to soft earnings from many of these firms. LinkedIn, for example, had a solid quarter, but management took on a more conservative view of the future growth and lowered guidance for 2016. Likewise, Tableau trimmed Q1 2016 revenue expectations from analyst expectations of around $179 million to between $160-165 million. In addition, its CEO warned of weaker software spending, specifically among North American companies. LinkedIn’s CFO also referenced market weakness, although more generally looking at the economic environment, with weak performance in Asia and Europe factoring into its decision to lower guidance.

When investors see similar companies post weaker than expected results or show less confidence, it can impact the overall confidence in the sector, which seems to have happened here. And when a number of executives comment on market conditions, this can have a snowball effect.

For HfS, these individual stock fluctuations don’t really matter much by themselves. We are more interested in what this means for the market. Does this slow the progression toward SaaS being the rule and not the exception? We don’t think so. There is still a long lead-time in the software market for the transition to SaaS, as companies negotiate their internal lifecycles and as SaaS pricing models become more attractive. This highlights the big truth behind market adoption of SaaS—it is not a slam dunk. Enterprise buyers still need a compelling reason to shift their enterprise software to the cloud. Customers expect to be compensated for the lack of control and customization compared to on-premises software—frankly, in convenience and price.