Seeking Alpha
Long/short equity, deep value, special situations, contrarian
Profile| Send Message|
( followers)  

Thursday, one of the many SaaS darlings of this market, Textura Corporation (NYSE:TXTR), fell by 17% (and it also fell on Friday). The catalyst was a report from Citron Research accusing the company of fraud. I read the report by Citron Research but prefer not to voice an opinion on the matter of fraud. However, I must say that Citron Research is very credible in my eyes, for I have read many of their reports in the past and highly value their research.

Besides, if there was any fraud committed or not, it is not up to me to decide. The SEC is the only institution that has a saying in these matters. I am sure they are looking into Textura as I write this article and will inform us of their opinion on the matter of fraud sooner or later.

Fraud or no fraud, Textura is worth a lot less

If there is any fraud committed, then obviously the stock is probably not worth much. However, even without the element of fraud, Textura is still only worth a fraction of its current price. Let me explain.

Irrespective of the niche market Textura is in, the question at the end of the day is how much you should pay for any stock. As such, when a company is losing money year after year after year, why would anyone pay a forward PE of 200 (data from Yahoo) and a Price/Sales ratio of 26 for any stock? The answer is, I do not have an answer.

OK, one can probably find (or invent) some kind a metric in order to convince himself or others that the growth the company is exhibiting is worth it, but then again, when you read statements such as these (from the company's recent registration statement), you have to ask yourself if you should reconsider your logic:

We have a history of cumulative losses and we do not expect to be profitable for the foreseeable future.

We have incurred significant losses in each period since our inception in 2004. We incurred net losses of $15.9 million in the fiscal year ended September 30, 2010, $18.9 million in the fiscal year ended September 30, 2011 and $18.8 million in the fiscal year ended September 30, 2012. We incurred a net loss of $31.3 million in the nine months ended June 30, 2013, and as of June 30, 2013, we had an accumulated deficit of $169.9 million. These losses and accumulated deficit reflect the substantial investments we made to acquire new enterprise client relationships and develop our solutions. We expect our operating expenses to increase in the future due to anticipated increases in research and development expenses, sales and marketing expenses, operations costs and general and administrative costs, and, therefore, we expect our losses to continue for the foreseeable future. Although our revenues have increased significantly over the past three years, you should not consider our recent growth as indicative of our future performance. We cannot assure you that we will achieve profitability in the future, nor that, if we do become profitable, we will sustain profitability.

Again, putting the issue of fraud aside, when one looks at the entire SaaS space, things are not much different than what one sees in Textura. And that is, a sector that is grossly overvalued beyond any stretch of the imagination. Please have a look at some of the other over-stretched (and that's an understatement) stocks in the space:

PE

Forward PE

Price/Sales

Price/Book

1-YR Target

Salesforce.com (NYSE:CRM)

-

109

8.8

11.4

$59.77

Workday (NYSE:WDAY)

-

-

35

23

$84

NetSuite (NYSE:N)

-

-

19.3

35

$106

Ultimate Software (NASDAQ:ULTI)

200

82

11

25

$163

The entire SaaS space is vastly over-inflated, stretched and at bubble valuations, and I for one cannot find any formula that makes any kind of sense for the sector's current valuation.

Yes I know these stocks have had a good run over the past two years or so, but I find it hard to believe that they can continue to trade at such valuations forever. At some point in time the market will come to its senses, and when it does, be on the lookout if you have any of these stocks, for the correction can be much more than you imagined or bargained for.

Source: It's Not Just Textura, The Whole SaaS Space Is Stretched