Yesterday came the news that Adam Selipsky, a veteran exec at Salesforce, will become CEO of AWS. Selipsky used to be a VP at AWS before he became President of Tableau, which got bought by Salesforce. This shows the depth of the talent they have at Salesforce, where one of their VPs could take over as CEO of the world’s largest cloud provider. Andy Jassy, the current CEO at AWS, will become CEO of Amazon.com.
GauchoRico wrote an excellent article showing the big drops his portfolio has gone through over the past 3 years: https://gauchorico.com/big-drops/ . Those drops are familiar to all of us who have been in SaaS stocks since 2018 or earlier. But Salesforce, the grand-daddy of all SaaS companies, has been publicly traded (ticker CRM) for over 16 years now. That’s more than 5 times longer than the 3-year period covered by GR’s post. What can we learn about drawdowns and recoveries in SaaS stocks by studying 16+ years of CRM’s price history? I’ll get to that in a second. But first,
Some Facts About Salesforce
Salesforce was founded in 1999 by a visionary CEO, Marc Benioff, who got the idea to build a cloud-delivered service for businesses to track sales leads and customer contacts while swimming with dolphins in Hawaii. The fact that Amazon used a Website to deliver goods inspired him, and he wanted to build a UI that was as easy to use as Amazon.com.
The company 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, 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 $20B today, and the price is around $200, so it’s a 60-bagger since the IPO.
By comparison, Cloudflare (NET) grossed $400M last year, and its sales are compounding at 50% annually. It’s a no-brainer to extrapolate that they too will hit $1B in revenues 3 years from now, unless they really screw something up. 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. Examples include Twilio, Shopify, and Zoom. Datadog, Okta, Crowdstrike, TTD and Roku should hit $1B in sales, or be close to it, by the end of this year, and Teladoc is already there.
Salesforce still manages to grow revenues at 20% annually, even now, on top of a revenue base of $20 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.
Salesforce grew so big that it had no problem paying $15 billion in stock to buy Tableau in 2019. It grew so big that it had no problem paying $27 billion for Slack last year. It grew so big that the Dow Jones index decided to kick Exxon out of the index, and replace it with Salesforce. Exxon used to be the most valuable company on the planet, by market cap.
Ok, so we have here an example of a mature SaaS company, with recurring revenues, that’s been around for 16 years, and which would have grown your initial investment by 60x if you had held it since the IPO. But how easy would it have been to hold it for 16 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 16 years, you experienced steep price drops of 20% or higher a total of 10 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% ?
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Average -33% 132
Median -28% 98
As you can see, after hitting the bottom price at the trough date, it took a median of 98 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 10 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