It's been a brutal week for the cloud kings, the worst in recent memory, and it's difficult to see what can turn them around any time soon.
Unfortunately, because of their size and their long-term leadership positions, the damage might be lasting. Investors have long since regarded the stocks that dominate the cloud space as immune to the slings and arrows of the world's economy, because of their clients' endless drive to digitize and get off the expensive on-premises software and migrate quickly to the cheaper, faster, better cloud.
Now the growth investment community is abuzz with the idea that the great growth story of the era -- software-as-a-service -- is at an end.
It all started with a Workday (WDAY) analyst meeting on Tuesday, where CEO Aneel Bushri said "we're definitely seeing some delays" when it comes to his human capital business, hardly something you want to see when you are paying 100x earnings. So even though the stock had fallen from $224 to $181 going into the meeting, it was pummeled and lost 22 points.
It also didn't help that the company said it wanted to get into the procurement business, which is the domain of the highly successful Coupa Software (COUP) , with a stock up about 120% for the year. That stock promptly fell from $158 down to $136. Why did Workday have to enter the procurement fray? The analysts who covered the meeting almost universally chimed that slowing human capital core growth forced it into a new vertical. The ugliness in the whole group became palpable.
Then the unthinkable happened. Citi downgraded Adobe (ADBE) while Morgan Stanley slashed ServiceNow (NOW) from buy to hold. Adobe's stock had already fallen from $311 to $279, but the stock of a truly sainted company quickly retreated 22 points.
Similarly, NOW had been as high as $303 before retreating to $273. No matter, the downgrade caused it to shed another $20.
Citi cited a weak risk-reward for Adobe and discussed the mixed prospects for some of its digital commerce business, a key growth area. Morgan Stanley damned ServiceNow as expensive considering an increase in R&D spend to stay ahead of the pack.
While both Adobe and ServiceNow were quickly defended by their myriad acolytes, it simply didn't matter.
The final blow? Oddly, the book tour of Marc Benioff somehow resonated negatively for Salesforce's (CRM) stock. Some thought Benioff was too self-deprecating. Others questioned how he could spend time doing business and promoting Trailblazer. Still others thought he spent too much time talking about the need for self-regulation lest the government steps in. He called for the breakup of Facebook (FB) because of its power over the media and reiterated that it's a cancer for today's youth.
I thought the worries for Salesforce nonsense. After all, it just reported the best quarter of the group with multiple price target boosts. But I am considered a homey for Benioff, so my view's been dismissed. He's considered the father of the cloud, so anything negative is going to tarnish the stocks.
All of these negatives coalesced to trash the entire group and left their stocks in tatters. Can tech stocks still advance without the software-as-a-service group? It will be tough. On Wednesday, IBM (IBM) reported a panned quarter, which included verbiage claiming a slowdown in spending in Germany and the UK to key SaaS markets.
Plus, while there has been a break in the IPO market right now after a deluge, that can't last long, and new stock will weigh heavily on the investors as they have to sell something to get the stock in of these unicorns. That's a heavy millstone.
What can turn the group around? I would say that the best bet will be the Adobe November 4 analyst meeting. If CEO Shantanu Narayen raises his growth rate, it could ignite the entire sector. Alternatively, bargain hunters come into the group, although they are hardly bargains.
I think that this decline is pretty seminal. It's a signal that the companies are more economically sensitive and may be out of runway. Competition's coming. So the multiples must come down. And the group's no longer the sainted sector. It's lost its luster. You can still own one, in case we get some sort of rebound. We own Salesforce for Action Alerts Plus. Otherwise, these are untouchable until we hear something positive from a SaaS company, and I don't know if we will do so.
