Paul Tudor Jones is one of many money managers who believes that protecting your money is more important than making it. In my latest article, I discussed this very concept in relation to cloud software stocks.
The main risk to cloud software during a less-than-ideal economy is downgrades and churn. Signing new customers can also be a challenge. How a company is faring will often show up in net retention rates. My guess is we will see some cloud software companies remove this metric from their Q2 earnings report or we will see previously strong net retention rates dip below the ideal thresh-hold of 100% to 106%.
Key metrics like net dollar retention rate come from venture capital deals where the goal is to exit through the public markets or through an acquisition. This key metric is helpful to consider but it also fizzles out over time. Venture capitalists are less concerned with the long-term growth of a company as they have already exited by the time subscriptions see serious churn.
Lower net retention rates eventually happen to roughly half of the software companies that are on the market for three years but covid-19 may speed this up or cause churn in otherwise strong subscription models.
Before the coronavirus, I championed cloud software at their low point in September of 2019. It seems like a distant memory now but Zoom, Twilio, Okta and MongoDB were down roughly 30% in a very short time span of one week over no major news or negative catalyst. My article’s subtitle stated, “Investors have dumped cloud stocks, which could prove to be a costly mistake” — this could not have been more accurate as cloud software led the rally off the March lows with some stocks up nearly 200% in one month. I was firm during the value rotation that these stocks would out-perform and I expanded on this as one of my top tech trends in 2020.
Considering we are at all-time highs and many gains have been clocked, I think it’s the perfect time to identify the indicators that might help determine if a company will be resilient post-covid. This was very important when the market showed signs of indiscriminate selling and is also important now when we’ve seen indiscriminate buying.
You can read more by following the link below to the article posted on Forbes.
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