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More $10 billion software companies are being minted than ever before — here’s why

Posted on September 23, 2019 by King

H/O: Datadog IPO at Nasdaq 190919

Other years have had more tech IPOs than 2019, but there’s never been a year that’s minted so many big ones.

After Datadog’s first-day pop on Thursday, the provider of analytics and monitoring tools became the fourth cloud software company to go public in 2019 and attain a market cap of at least $10 billion. Videoconferencing company Zoom, chat app Slack, and cybersecurity vendor Crowdstrike are the three others.

The new crop brings to 16 the total number of cloud software companies in the 11-digit club. While 14 of those companies have gone public since the beginning of 2012, this is the first year with more than two that reached $10 billion in value.

It’s just the latest sign that public market investors are hungry and willing to pay up for high-growth technology companies as long as the financials make sense, even as they shun cash-burning consumer businesses like Uber, Lyft and WeWork.

Jason Lemkin, an investor at SaaStr, sees the cloud market continuously opening up to more categories, expanding the overall pie. According to Gartner, the global market for public cloud services will climb 17.5% this year to $214.3 billion. That money is being spread across many areas, including productivity apps, developer tools, security and backend infrastructure.

“There are 100 cloud categories that can do $1b in annual revenues,” Lemkin wrote in a message. “All the IPOs are on track to get that. All good ones at least.”

The 2019 class is particularly attractive to investors because the biggest of them show extremely high customer retention rates, meaning that they’re very efficient with their sales and marketing dollars. Not only are customers sticking around, but they’re increasing the size of their contracts.

Datadog recorded retention in its latest quarter of 151% — a customer that spent $100 a year earlier is now shelling out $151. Crowdstrike reported a retention rate of 147% as of January, Slack’s was 143% and Zoom was at 140%.

According to Tomasz Tunguz of Redpoint Ventures, any company that’s at 140% or higher is in the top decile of subscription businesses, based on a survey the firm conducted with 600 respondents.

“Recently, we’ve seen a series of product-driven companies building huge customer bases with tremendous account expansion and terrific sales efficiency,” Tunguz wrote in a post on Aug. 26, about Datadog’s IPO filing. “Datadog is no exception.”

Datadog’s revenue increased 82% to $83 million in the quarter that ended in June, putting it right up there with its 2019 peers. Zoom posted 96% growth in its most recent quarter, just ahead of Crowdstrike at 94%. Slack was a relative laggard at 58%.

RT: Eric Yuan, CEO of Zoom IPO 190418
Eric Yuan, CEO of Zoom Video Communications poses for a photo after he took part in a bell ringing ceremony at the NASDAQ MarketSite in New York, April 18, 2019.
Carlo Allegri | Reuters

With rapid expansion and high retention comes high multiples — and more risk. On a price-to-sales basis, Zoom,
Crowdstrike and Datadog are by far the most expensive software companies across the entire market, with each valued at 39 times revenue or higher, according to FactSet.

Eventually, early investors are going to want to lock in some gains, creating the potential for a flood of new shares on the market and a corresponding price drop. Zoom’s post-IPO lock-up period expires next month, giving many insiders their first opportunity to sell, with the stock up well over 100% from its debut price in April. Crowdstrike’s expiration is set for December.

Slack chose the direct listing route, so investors could sell right away, and they’ve been doing plenty of it since the debut in June. The stock is below its $26 reference price and has lost one-fifth of its value in the past three weeks, although at least some of that can be attributed to Microsoft’s renewed effort to take on Slack with its Teams product.

“In our view, MSFT’s competing Teams service significantly reduces WORK’s pricing power and limits the enterprise penetration opportunity,” wrote Gregg Moskowitz, an analyst at Mizuho Securities, in a report on Sept. 12. Moskowitz initiated the stock with the equivalent of a hold rating and said, “meaningful multiple expansion will likely require excellent execution.”

[“source=bbc”]

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