How are software investors weighing the impact of coronavirus?
Over the last few weeks, the S&P 500 dropped over 10%, with the largest one-day declines in nearly a decade. You’ve probably seen lots of articles about individual stocks that have been heavily impacted by coronavirus like Carnival Cruise Lines (-50% YTD) and Zoom (+65% YTD), but here are some category-level observations on what investors are buying and selling.
S&P 500 Performance by Sector
During the large drops on February 27 and 28, the various S&P 500 sectors moved together pretty closely, but last week, some sectors began to recover while others declined further:
- The energy sector has been struggling since January, but as travel and economic activity slow, the demand for energy is dropping dramatically, and most of this demand will not be “made up” later
- Meanwhile, consumer staples (Walmart, P&G, Coca-Cola, Costco) are only down 4.7%. Sales for these companies have been pulled forward (e.g., people hoarding toilet paper), but over time there should be a consistent, predictable level of demand for these types of products
SaaS Stock Performance by Category
Zooming in on the technology sector, SaaS companies were down an average of 11.7% from February 20 to March 6, matching the S&P 500’s return. However, there are several interesting takeaways when you take a closer look at the data:
- Of course, the biggest “winners” in SaaS right now are the collaboration companies (Zoom, Slack, Atlassian, Smartsheet, Dropbox). Zoom, for example, added more users in the first eight weeks of this year than all of 2019
- Payments companies (Square, Shopify, Paypal, Zuora) are down 16% because they are dependent on economic activity and transaction revenue, much of which comes from small businesses that will be more affected by coronavirus than larger companies
- The other two categories that have underperformed the SaaS average are data/analytics and security, both segments that often require complex, in-person sales and implementation work, which will be heavily impacted by limiting travel and face-to-face meetings
SaaS Stock Performance by Cash Position
Finally, in times of uncertainty, companies need to ensure they can survive and adapt, which means having enough cash on hand to pay for operating expenses like payroll, rent, and infrastructure.
- The chart above shows the performance of SaaS stocks by how much cash they have relative to their operating expenses (SG&A expense + R&D expense), assuming no cash flow from revenue or financing
- Companies with less than 1 year of cash on hand are down 14%, while companies with 2+ years of cash are only down 8%, suggesting investors are putting a premium on strong cash positions
Most of the time, individuals are pretty dumb (see: r/WallStreetBets), so it’s fascinating to see how over time, markets respond relatively rationally to new information.
Looking at data from last week, we can already see that investors are favoring companies with certain attributes, and as we learn more about coronavirus over the next few weeks, we will continue moving away from short-term volatility to seeing how investors are weighing the long-term impact of coronavirus on specific categories and companies.