The stock market had an awful day today, and tech companies were hit harder than most other sectors.
But within tech, one segment did particularly poorly today: “software as a service” companies that cater to enterprises.
- Box, which lets companies store files and collaborate through the cloud, was off almost 12% and is in danger of dipping below the $1 billion market cap mark for the first time since going public.
- Zendesk, a cloud-based customer service company, also lost almost 12% and is in the same danger.
- Workday, cloud-based HR software, lost almost 10% and is now at an all time low since its first day of trading in Oct. 12 (although still about 2x higher than its initial IPO price)
- Even SaaS industry leader Salesforce was off 7.5%, bringing it to its lowest point since 2014.
These companies are financially quite different than traditional software companies like Microsoft and Oracle because instead of selling software licenses with smaller ongoing fees for things like support, they sell subscriptions. That means the revenue from each sale gets recognised over a long period of time, rather than being recognised mostly up front.
As a result, most of these companies spend heavily on sales and marketing, in hopes that the lifetime value of each customer will cover the costs.
But that means they tend to have spectacularly low — or in the case of these four companies, negative (impossible to calculate) — price-to-earnings (P/E) ratios.
In the current environment, where investors are fleeing for safety, the bet that these companies will eventually turn the corner and generate consistent profits seems to be one that many investors aren’t going to take.
Here’s a chart of all four of these companies’ stock prices since the beginning of 2016. It isn’t pretty:
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