Are stable SaaS valuations driven by logic, or hope?
Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
The resilience of the American stock market in the face of near-record unemployment (there were nearly three million more unemployment claims reported this morning) has become a regular topic of conversation. The disconnect between what the American economy's health appears to be (poor, falling) and the recent, rebounding performance of American equities has been covered broadly - CNBC, Fortune, the Washington Post, NYMag, the list is endless.
The answer concerning why the stock market is holding up in the face of a rapidly deteriorating economy isn't singular. Reading around and listening, there are a number of reasons that have support from serious folks. If you hunt around even a little, you'll run into arguments like, well, where is everyone going to put their money when interest rates are low and the government is boosting the money supply?" or, big tech companies are driving the major indices, and they're holding up, so everything makes sense."
Whichever line of thinking makes the most sense to you is fine. Most are subjective. The argument about technology companies holding up the sky, however, has some empirical truth to it. Tech companies are outperforming other cohorts, which in turn is bolstering the indices in which they reside.
How long the trend can persist is unclear. As Bloomberg's Joe Weisenthal wrote this morning, the future of the economy can't purely be what we consider tech because every company that we're talking about depends on non-tech companies to do business with." Adding to that, others have noted that even tech giants have exposure to the slipping economy. In time, some technology companies may fall prey to the same economic gravity that is compressing so much else of the nation's businesses.
The differing fortunes of stocks and the economy becomes even sharper if you zoom in to look at just public SaaS and cloud firms. This particular cohort of tech companies has seen an even more striking return to form than tech shares more broadly.