With the stock market turning firmly negative in recent months, it’s important to try putting things in historical context. Investors have seen shares of many companies get cut in half or more. It happens from…
time to time. Some deserved it. Others have great businesses in rapidly expanding industries.
Software-as-a-Service (SaaS) stocks are an example. Although valuations are lower, the businesses continue to perform well. That’s why I thought it would be useful to look back a decade at former highflying SaaS stocks — first, to see if they also experienced a significant decline in the price-to-sales (P/S) ratio, and second, to see if their growth was able to overcome the valuation crunch and make them good investments over the long term.
Here’s what I found.
An impressive cohort
Five of the most high-profile — and expensive — tech stocks to go public in 2012 were Workday (WDAY -3.25%), Splunk (SPLK -7.74%), Palo Alto Networks (PANW -4.68%), and ServiceNow (NOW -2.68%). Respectively, they offered software to manage and analyze human capital, machine data, cybersecurity, and information technology workflows. The largest initial public offering (IPO) of 2012 was Meta Platforms (FB -2.17%) — it was just Facebook back then. It isn’t SaaS, but it belongs in any analysis of 2012 IPOs.
Creating a somewhat similar cohort of tech companies that have come public in the past few years isn’t difficult. We’ll compare the 2012 group to Snowflake (SNOW -6.57%), CrowdStrike (CRWD -8.94%), DataDog (DDOG -1.67%), Cloudflare (NET -15.68%), and MongoDB (MDB -5.13%). Let’s compare the numbers.
Growing into their valuation
If we’re going to make a comparison to the past, we need to first establish just how expensive the stocks were. We’ll use the beginning of 2013 — the year after their IPO — as a starting point to find their peak valuation.
| Company | Peak P/S Ratio |
|---|---|
| Workday | 42 |
| Splunk | 33 |
| Palo Alto Networks | 19 |
| ServiceNow | 27 |
| Meta Platforms | 23 |
DATA SOURCE: YCHARTS.
They were all growing sales between 50% and 90% per year. That’s similar to today’s cohort of beloved tech stocks. All but ServiceNow saw their P/S ratio decline over the next decade.
Declining valuations don’t mean bad investments
Even with declining valuations, every one of the stocks has significantly outperformed the S&P 500 Index since the beginning of 2013. That’s no guarantee for the future. But it should lay to rest any notion that just because a stock has a high valuation, it will trail the market. Before ascribing the outperformance to the pandemic, you should know the…
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