Salesforce.com (CRM), the granddaddy of all SaaS companies, has 17 years of price history that we can study and learn from. This was the first publicly traded company whose business model was primarily based on software sold as a subscription and delivered over the Internet. If your company has recurring revenues like this, your sales force (no pun intended) can take a do-nothing vacation in Hawaii for a year, and you would still generate roughly the same revenue as last year, as long as your operations and support team can keep your existing customers happy.
CRM just dropped over 26% from the November high. So its time for me to update a post I wrote last March, which was the last time CRM dropped more than 20%. In that post, I kept track of all 20%+ drawdowns in CRM since 2004, including the size of the drop, and the number of days to recover to the previous high. Here’s that post:
https://discussion.fool.com/what-we-can-learn-from-salesforcecom…
Some Facts About Salesforce
Salesforce went public in 2004 at a split-adjusted $3 per share. That looks cheap now, but it certainly was not cheap at the time. In fact, in 17 years, CRM has never traded at a P/E lower than 45, ever. Like most SaaS companies, CRM spent many years reporting losses because they were spending heavily to increase market share and product development. During the few years that they did report profits, the P/E ratio was well north of 100.
In 2006, their revenues hit $310M, and kept compounding at 45% annually, hitting over $1B just 3 years later. Revenues exceed $25B today, and the price is around $228, so it’s a 75-bagger since the IPO.
Now, let’s pause here. Only 10 months ago, revenues were $20B, and you had a 60-bagger after the price fell 23%. Now, the company has tacked on an additional $5B of TTM sales in less than a year, the stock has fallen 26%, and you have a 75-bagger! See how compounding works?
Those of us lucky enough to have been following this board for 3 years were able to buy a number of SaaS companies while they were still generating less than $300M in revenue, and have seen them grow beyond the $1B mark in sales.
Salesforce still manages to grow revenues at 27% annually, even now, on top of a revenue base of $25 billion. That’s more than 20 times the annual revenues most of our companies are at, and shows how early we still are with our picks. The thing about the SaaS business model is that the dominant first movers wind up taking most of the total addressable market share. It’s a “winner take most” industry. Most of the SaaS companies we own happen to be dominant first-movers. There’s no reason to sell any of them if a sector downdraft pulls them all down at once. The main reason to sell is if their earnings calls indicates a failure to deliver on their sales goals.
Ok, so we have here an example of a mature SaaS company, with recurring revenues, that’s been around for 17 years, and which would have grown your initial investment by 75x if you had held it since the IPO. But how easy would it have been to hold it for 17 years? That’s where your mental conviction comes in, as I’ll explain next.
CRM Drawdowns and Recoveries
As the table below shows, if you held CRM for 17 years, you experienced steep price drops of 20% or higher a total of 11 times. On average, you would experience such a price drop at least every other year. But the price has bounced back to the previous high every time, and the table shows how many days it took to bounce back.
Peak Trough Peak Trough Days to. Recovery. Days to
Date Date Price price Trough Drawdown Date Recover
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11/7/04 2/20/05 $5.00 $3.50 105 -30% 5/29/05 98
1/22/06 7/16/06 $10.40 $5.48 175 -47% 10/8/06 84
12/23/07 2/3/08 $16.10 $12.70 42 -21% 3/30/08 56
6/8/08 11/16/08 $18.20 $5.58 161 -69% 12/20/09 399
7/10/11 12/18/11 $38.60 $24.50 161 -37% 3/25/12 98
2/9/14 5/4/14 $63.60 $50.30 84 -21% 11/9/14 189
11/9/15 2/7/16 $82.10 $59.70 90 -27% 5/29/16 112
9/23/18 11/18/18 $159.00 $122.00 56 -23% 2/10/19 84
2/6/20 3/29/20 $189.50 $134.30 52 -29% 6/8/20 71
8/23/20 3/24/21 $271.00 $210.00 213 -23% 9/1/21 161
11/8/21. 1/5/22. $309.86. $227.67. 58. -26%. ? ?
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Average -37% 135
Median -29% 105
As you can see, after hitting the bottom price at the trough date, it took a median of 105 days (a little over 3 months) for the price to bounce back to the previous high. On one occasion, in 2014, it took about 6 months. And there was one outlier, the Great Financial Crisis of 2008, where it took a little over a year to recover. We happen to be in one of those drawdown periods now. Note, we only have 11 data points, and history may not repeat.
But I hope the above helps give you some perspective on things. Don’t get caught up in day to day stock price movements. Zoom out for the bigger picture.
-Ron