Though the Nasdaq is up 29% on the year and within striking distance of its recently-set highs, many fast-growing enterprise software firms are still gradually seeing their valuations compress.
The post-earnings selloffs witnessed on Wednesday by Salesforce.com (CRM) , Workday (WDAY) and Zscaler (ZS) serve as fresh evidence. None of these companies delivered anything resembling an awful earnings report, even if they fell short of perfection.
Salesforce, which fell 3.3% on Wednesday, beat its October quarter revenue, EPS and billings estimates, with revenue rising 24% annually after backing out $308 million in sales from recently-acquired Tableau Software. Strong organic growth was seen by all four of the cloud CRM software giant's reporting segments, and the company's remaining performance obligation (RPO - the total value of contracts on the books for which revenue hasn't yet been recognized) rose.
However, though it's worth noting Salesforce has a history of guiding conservatively, revenue guidance for the January and April quarters was merely in-line with consensus estimates, and January quarter EPS estimates (impacted by aggressive spending) fell short. Also, Salesforce's guidance for roughly 21% RPO growth was slightly below consensus, and some investors may have been disappointed that for now, the company is merely reiterating its fiscal 2021 (ends in Jan. 2021) revenue guidance.
Workday, which fell 4.7%, beat October quarter revenue and EPS estimates (revenue rose 26%), and issued above-consensus January quarter sales guidance. On the flip side, billings missed consensus by a few million and -- though Workday has also tended to guide conservatively -- the cloud HCM and financials software giant's preliminary guidance for 21% fiscal 2021 (ends in January 2021) subscription revenue growth was only in-line.
Also of note: Whereas Workday said during its October analyst day event that macro uncertainty has led to delays for a limited number of deal closings, CEO Aneel Bhusri suggested on Tuesday's call that macro issues didn't really impact Workday's October quarter performance, and said he's "cautiously optimistic" that the same will hold for the January quarter and 2020.
In most respects, Zscaler, which fell 5.6%, delivered a good report. The company, which has developed pretty innovative, cloud-based, network and web security platforms, once more beat revenue, EPS and billings estimates (revenue rose 48% and billings rose 37%). It also issued mostly above-consensus January quarter sales guidance, and hiked its fiscal 2020 (ends in July 2020) revenue and billings guidance.
Relative to consensus estimates, light EPS guidance (affected by heavy sales spending) was the only real blemish here. However, with the midpoints of Zscaler's fiscal 2020 revenue and guidance ranges respectively implying 35% and 29% growth, some investors might have wanted to see the company guide for less of a deceleration.
To reiterate a point made a few times before, many enterprise software names have been dealing with a high bar. And even now, with companies such as Workday and Zscaler trading well below their 52-week highs, Wall Street is deciding that multiples are still at a level where any earnings report that isn't perfect or close to it merits a selloff.
One piece of good news here: Following several months of underperforming the Nasdaq while reporting healthy double-digit revenue and billings growth, forward sales and billings multiples have compressed for a lot of these firms, even if they still aren't (by and large) low.
Salesforce now carries an enterprise value (EV - market cap minus net cash) equal to 5.8 times a fiscal 2021 billings consensus of $22.9 billion, and Workday now has an EV equal to 7.7 times its expected fiscal 2021 billings. Zscaler (no doubt due to its higher growth rates) remains a little pricier, with its EV equal to 9.7 times its expected fiscal 2021 billings, but that's still well below what its forward EV/billings ratio looked like for much of this summer.
The other positive here is that unlike enterprise hardware firms, many of which are reporting major top-line pressures while putting much of the blame on macro issues, high-growth enterprise software names (and for that matter, public cloud giants) are still generally posting good top-line numbers and signaling that macro headwinds are limited or non-existent. For some reason (wink, wink), companies on the good side of secular IT spending trends are far less likely to report serious macro pressures than companies on the bad side of them.
Thanks to these trends, if tech stocks -- many of which have made new 52-week highs during the last month -- more broadly see a correction that drags enterprise software firms lower along the way, this space might just provide buying opportunities for more valuation-sensitive investors in a way that it hasn't for a while.