Weekly Dashboard 1/1/2021: 2020 year in review, B2B SaaS edition

Albert Wang -

👋 Public Comps Customers 👋

Happy New Year! What a journey the past year has been for investors, software operators and engineers, and the entire industry of B2B SaaS. Multiples have stretched and re-rated as software demonstrated a unique ability to sustain growth during an incredibly difficult economic period, as COVID-19 proved to be a structural tailwind amongst ongoing digitalization trends. This was further catalyzed by macro-trends of effective fiscal stimulus and a near-zero interest rate environment.

1️⃣ SaaS Stock Prices vs. Benchmarks 📊

Note, top 10 SaaS here includes: ZM, CRWD, SNOW, SHOP, ZS, OKTA, TWLO, DDOG, ESTC, DOCU.

Change since bear market start (2/19/2020):

  • ZM: +224.6%
  • Top 10 SaaS: +138.3%
  • Bessemer Cloud Index (EMCLOUD): +77.8%
  • B2B SaaS: +53.0%
  • S&P 500: +10.9%

Change in the past week:

  • ZM: -10.1%
  • Top 10 SaaS: -7.0%
  • Bessemer Cloud Index (EMCLOUD): -4.4%
  • B2B SaaS: -4.4%
  • S&P 500: +1.4%

Market update📉: Stocks began the week on a positive note, helped by President Donald Trump’s signature of the 900B coronavirus relief bill last Sunday night. Optimism over the rollout of new coronavirus vaccines also seemed to support sentiment. The UK became the first country to approve the use of the vaccine developed by AstraZeneca and Oxford University. Slower-than-expected distribution of the currently authorized Pfizer/BioNTech & Moderna vaccines may have dampened enthusiasm somewhat, however, as did the discovery on Tuesday of the first domestic case of an apparently more infectious strain of the virus. COVID-19 case growth in the U.S. continued to moderate after the post-Thanksgiving spike, but the ongoing increase in hospitalizations raised further concerns about ICU capacity in some parts of the country. Home prices rose at a faster pace than predicted in October, but November pending home sales unexpectedly fell 2.6%, reflecting constrained inventories. Weekly jobless claims defied expectations for an increase and fell to 787,000, the lowest level in almost a month. The major indexes hit all-time highs but ended the week mixed, with small-caps and tech recording heavy losses as the rotation to value continued. Despite this, stocks closed out a year of solid gains led by the technology-heavy Nasdaq Composite Index (+49%), which notched its best annual performance since 2009. Health care shares outperformed within the S&P 500 and consumer discretionary shares were also strong. Energy stocks lagged, and the large technology sector was also weak.

2️⃣ B2B SaaS EV/NTM Revenue Valuation Multiples 🔥

2020 year beginning:

  • High growth SaaS: 13.3x
  • Medium growth SaaS: 8.1x
  • Median B2B SaaS: 7.9x
  • Low growth SaaS: 5.4x

2020 year end:

  • High growth SaaS: 29.9x
  • Medium growth SaaS: 17.6x
  • Median B2B SaaS: 14.2x
  • Low growth SaaS: 8.4x

3️⃣ Top performing public B2B SaaS 📈

2020 return of top 10 best performing public B2B SaaS
  • Zoom: +391%
  • Cloudflare: +346%
  • Crowdstrike: +328%
  • ZScaler: +322%
  • Appian: +318%
  • Fastly: +306%
  • Bill.com: +253%
  • Twilio: +228%
  • Domo: +203%
  • Docusign: +193%

What a year for software stocks – on average, public B2B SaaS were up 76% on the year, and only 14 out of the 108 companies we track ended the year down. Here are some common themes seen among the top 10 performing B2B SaaS:

1) Sector: No surprises here, but security, payments, and remote-work enabling software dominated. COVID-19 reduced many barriers to adoption as many companies in these industries reached an inflection point on their respective S-curves. This created unit growth and mitigated risk because one of the biggest drivers of tech failure is slowing demand – which is less likely to happen at the inflection point. Moreover, all saw multiple catalysts driven by larger, macro-events: fiscal stimulus promoted the adoption of software-enabled payments, the SolarWinds breach demonstrated the mission-criticality of security, and widespread adoption of WFH helped facilitate the idea that adoption of remote work tools would become a secular trend.

2) Category Leader: In addition to specific sectors outperforming others, category leaders disproportionately benefited from having better unit economics. De facto industry leaders were able to grab significantly more market share during times of uncertainty as their reputation allowed them to acquire customers at near zero CAC, and they're able to leverage their own scale to offer additional features to customers to improve their ability to land amongst new cohorts. Additionally, the management teams of these category-leading companies showed their ability to not only execute their vision during a volatile pandemic, but their ability to predict and act on industry trends.

3) Consumption/self-service models: Interestingly, many of the top performing software stocks were consumption-driven. Companies like Fastly, Twilio, and Docusign charge a portion of their revenues on a per-usage basis. The beauty of these consumption-based models is that they aren't incentivized to slow down and aren't constrained by number of seats or accounts within an organization or sales cycles (which were heavily impacted by COVID-19). Similarly, most of the companies listed are also self-service, including Crowdstrike and Zscaler with the ability to deploy and have immediate ROI within minutes of installation. Self-service has the added benefit of producing tangible ROI through free trials, and helps reduce selling & marketing friction. The success of these models highlight how software distribution has evolved from traditionally selling to the "economic buyer": the CIO, CRO, CMO, or CFO of an organization to now, the adoption of the bottoms-up, organic distribution from user to user. The advantage of this model is that its significantly more efficient to scale than the legacy top-down approach. This allows software vendors to evangelize the solution, offer product feedback, and form, in effect, an extended salesforce inside of major companies. This lays the foundation for a lean enterprise sales team to approach a very targeted set of prospects, and maximizes the ability to cross-sell and up-sell within existing customer cohorts.

Stay safe everyone and happy new year,

Albert Wang, Public Comps Team

albert@publiccomps.com

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Views expressed in theses emails are ours and ours alone and don't represent that of our previous or current employers. Public Comps provides financial and industry information regarding public software companies as part of our weekly dashboard, our blog, and emails. Such information is for general informational purposes only and should not be construed as investment advice or other professional advice.

Full disclosure: I own CRWD, TWLO, SHOP, TDOC, FB, COUP, MSFT, DDOG, ESTC, AYX, PLAN, ZM, and DASH.