Business SaaS enjoys Wall Street attention

Business software is seeing heightened confidence on the trading floor, with investors hedging on long-term subscription.
8 March 2019

The landmark Charging Bull. Source: Shutterstock

Business software firms are enjoying confidence on Wall Street, as investors put faith in their ability to maintain long-term business subscriptions, despite many running largely running at losses.

As reported by the Financial Times, some of those companies worst hit by a crash in tech company stocks in the final quarter of last year, have turned their fortunes around, with stocks reaching new highs in the last few weeks.

The hike in share prices, led by the likes of sales and marketing giant Salesforce, HR platform Workday— as well as Adobe and Microsoft— comes as investors put confidence in their ability to maintain user growth and long-term enterprise subscriptions, as they become essential tools in workers’ lives.

CEO of ServiceNow— whose shares have leaped by a third since the beginning of the year John Donahoe, told FT that investors value “first and foremost, growth”— and so, running at a loss right now might not (in theory) make that big a difference.

Donahoe went on to compare these software firms— “core, fundamental platforms”— to having a similar level of impact on workplaces as their consumer-side contemporaries, such as Facebook, Amazon, Apple, Netflix and Google, had on households.

Firms will spend around 50 percent of their budgets on sales and marketing, and revenue from long-term contracts can only be booked in future years, meaning they will run at a loss as they grow. However, investors are confident that many will become indispensable to businesses in due course.

Matt McIlwain, managing partner of Madrona Ventures, told FT that investors are learning that “these companies know how to put a dollar in today and get three out in the future”.

While many of the firms already mentioned are leveraging a growing movement towards cloud services— public cloud spending is forecast to reach US$210 billion this year, according to IDC— other companies seeing high confidence include workplace messaging app Slack and software development tool Atlassian.

The key to securing confidence, according to Donahoe, is convincing investors of the future potential of the product— or its “total addressable market”— whether or not it’s currently feasible.

That includes things people do at work that are not yet handled by the product, he adds; for ServiceNow, that approach has seen its stock market value reach more than US$40bn, despite revenues of less than US$3 billion last year.

But while there are certainly a lot of frontrunners, the SaaS market is highly competitive. An aggressive sales strategy can see a tool being adopted relatively easily, but this low barrier to entry, as a result, means only a small percentage are likely to become central workplace stalwarts in reality.

There is nothing constant about the market, either. On the one hand, consolidation could overtake the SaaS market, as a small number of firms begin to absorb ‘best-in-breed’ products as workplace service ‘suites’, while new technologies such as machine learning could see new entrants put pressure on SaaS incumbents.

However, as FT notes, the first SaaS companies to embed themselves in business will be some of the hardest to dislodge, and those in the leading line up may have already cemented their lead.