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Cloud Getting Darker For High Flyers

|Includes: Adobe Inc. (ADBE), CRM, NEWR, NOW, TWLO, WDAY, WORK
Summary

These companies represent high profile software as a service cloud providers.  They have largely been given high multiples on revenues despite having limited earnings.

The market lately has been rotating out of companies such as these and into more defensive names.

The following data is from my tracking models and may contain calculation or input errors.

Workday discussion on forward guidance led to a Morgan Stanley analysts comment that the recent pullback was not enough to dive into the sector given unfavorable risk/reward for a lot of the high fliers.

The last few months have been rough for momentum cloud software as a service or SaaS companies.  Morgan Stanley noted that the pullback in SaaS sector wasn't enough given valuations and slowing growth.  Other firms chimed in as well with a view that companies with enterprise value to sales multiple over 15x should be avoided.

SaaS valuations are still at risk to further market volatility.  We expect the group to remain choppy until we get through 3Q19 estimates.  Evercore ISI

Adobe (ADBE)

Adobe continued to deliver strong growth last quarter of 24%.  Free Cash Flow or FCF trailing twelve month multiple remained a robust 36.4x despite reporting a decline for the quarter of 13%.  Their trailing earnings multiple 50x trailing earnings remained over 2x earnings growth.

Trended earnings

  • October analysts: Citigroup downgrade to Neutral. Price target drop to $313.
  • 3Q19 EPS consensus last 60 days: Decrease from $2.30 to $2.26.

Salesforce (CRM)

Salesforce reports inconsistent quarterly FCF and EPS.  Their trailing nonGAAP earnings multiple was 46.9x.  Their enterprise is valued at 9.2 trailing revenues.

Trended earnings

  • October analysts: No news found.
  • 3Q19 EPS consensus last 90 days: Decrease from $0.71 to $0.66

New Relic (NEWR)

New Relic still loses money on a GAAP basis.  Their reduced guidance dropped their enterprise value relative to trailing revenues to 6.3x.

Trended earnings

  • October analysts: SunTrust initiated in October at Buy.
  • 3Q19 EPS consensus last 90 days: Increase from $0.12 to $0.15

ServiceNow (NOW)

ServiceNow has held up well relative to this group.  They do not have GAAP earnings.  Their enterprise relative to trailing revenues and nonGAAP earnings was 17.5x and 19.7x respectively.

Earnings trend

  • October analysts: Morgan Stanley downgrade to Equal Weight. Increased PT to $267. SunTrust initiated at Buy.
  • 3Q19 EPS consensus last 90 days: Decrease from $0.93 to $0.88

Twilio (TWLO)

Twilio does not have GAAP earnings or FCFs.  Their enterprise value relative to trailing revenue was 18.6x.

Earnings trend

  • October analysts: RBC initiated at Outperform
  • 3Q19 EPS consensus last 90 days: No change

Workday (WDAY)

Workday does not generate GAAP earnings to calculate a multiple.  Their enterprise value relative to trailing revenues and FCF is 12.0x and 22.7x respectively

Earnings trend

  • October analysts: Goldman upgrade to Buy. Citigroup upgrade to Neutral. RBC cut price target to $212.
  • 3Q19 EPS consensus last 90 days: Decrease from $0.40 to $0.37

Slack (WORK)

Earnings trend

Not completed

  • October analysts: Morgan Stanley cut price target to $28.
  • 3Q19 EPS consensus last 90 days: Decrease from $(0.07) to $(0.08).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.