When it comes to painful revaluation, Shutterstock (SSTK) -- discussed in part two -- is not alone. Take the 3-D printer companies, for example. 3D Systems (DDD) and Stratasys (SSYS) respectively sell at 58x and 40x earnings, with less compound revenue growth than Shutterstock and earnings and revenue that have failed to meet Street estimates. So, again, go through the exercise: If the best of the high-growth companies with earnings and sales growth rising can't maintain high price-to-earnings multiples, who knows where the selling will ultimately stop with the 3-D printing stocks?
Now, if you think it is difficult to value Shutterstock or 3D or Stratasys, let's consider the software names away from Salesforce.com (CRM), whose late-February reversal signified the market's shift. You know these bad boys, formerly the most loved stocks on earth: Workday (WDAY), Veeva Systems (VEEV), Concur Technologies (CNQR), Cornerstone on Demand (CSOD), Medidata Solutions (MDSO). All of these companies were all about one thing and one thing only: growing revenue as fast as possible. I believe that every one of these companies could indeed show a profit if it wanted to -- but, like Salesforce.com, they were trying to grow as quickly as possible in order to block others from coming into their zones of opportunity.
You can see how compelling that logic is to these companies. First, they are software-as-a-service companies, so why shouldn't they be valued liked Salesforce.com? And if you have a problem with Salesforce.com's valuation, than how do you explain Amazon's (AMZN) valuation? Amazon's the greatest performer of the era, and it is only valued by revenue, so why shouldn't our companies be valued on revenue?
The logic does seem ineluctable when you approach it like that. Until, that is, Amazon and Salesforce.com start to go down, not up, as is the case right now. Yep, the market's saying, "We only care about profitability and earnings-per-share multiples, not sales-to-enterprise value or any other once-important metric." These companies don't show any levels of profitability that can be used to validate their current prices. So what happens? The prices go down most days as the market struggles to find a place for them that makes sense.
Remember, however, that this isn't like 2000. Concur, a fine company, is making a ton of money. It is just spending it very fast in order to be sure that no one else will move into its space as the software-as-a-service pro for travel and entertainment expenses.
There is no way this company is going to be insolvent. But it is fair to say that, if it keeps dropping in value from $4 billion, it will be snapped up. That's because it is truly the only game in town.
I wish I could say that for all of the others. I can't, though. That's because they are all in categories that are now regarded as too crucial for IBM (IBM), Microsoft (MSFT) and, perhaps most important, Oracle (ORCL), to lose.
Yes, not only has the market decided to shun companies that have great revenue growth, but the software-as-a-service companies are now being targeted by big, older companies that fear they can't let their turfs be taken away by these upstarts.
I think Oracle, in particular, has decided: OK, we let Salesforce.com grow up before it knew what happened. But we are not going to let these other ingrates to take our clients away. I think Oracle is offering extraordinary deals in order to keep customers from going to these other companies, and that means the company's sales growth, which is what it pride itself on, could be about to slow. That's another nail in the coffin for the group.
That's the bad news. Now let me give you some good news: All of those smaller companies together do not equal $40 billion in market capitalization. That's right -- they are less than one-quarter of Oracle's market value. If they all went under, I don't even think it would matter to the market -- especially because, for the most part, they have no debt on their books.
These are trees falling in the woods, a non-event for all but those who live in treehouses.
There are other areas going through this incredible-shrinking exercise, as well. We'll look at them in part four.