Our working theory is that we are likely to see current markets events unfold in a similar fashion to 2000-2002 but in reverse. In March of 2000 we saw the dot-com bubble burst first and then 9/11 pushed us into a full blown recession by the fall of ’01. Today, our 9/11 (Covid-19) and recession happened simultaneously and what will eventually follow is another tech bubble bursting but this time in the cloud computing stocks.

These stocks have achieved sky high multiples as the result of above-average multi-year revenue growth during a period of sub-par economic growth. Even during the market turmoil created by what certainly looks like to be a world-wide recession, the resiliency of the price action in these stocks has lulled the investing public into believing they are safe havens. We are already seeing anecdotal evidence of a meaningful slowdown in revenue growth as a result of the US economic engine grinding to halt. IT budgets will be decimated going forward as businesses focus on survival rather than implementing the latest and greatest technology. Further, we expect renewal rates to fall dramatically as businesses, particularly small businesses, retrench.

What is the proper multiple for a money-losing, high revenue growth, high retention rate company when it becomes an even bigger money-loser, a slower grower and starts to experience lower retention rates? 

It is highly likely, after applying more conservative valuation metrics, that this group of stocks ultimately trades at prices 60-90% lower than they are at present.