In public and private markets, cloud earnings and valuations heat up

Good news for software startups riding the updraft

This quarter, strong earnings results from public cloud companies were overshadowed by a seemingly endless IPO cycle. Another moment we somewhat missed over the last few weeks was the stock market pushing the value of public cloud companies to all-time highs.

These events are connected. And they bode well for startups working on SaaS and API-delivered software, which are keeping the climate for cloud venture investment warm and valuations stretched by historical norms.

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The earnings results that have made Wall Street content include a growing number of cloud companies that are seeing revenue growth accelerate from Q2 2020 to Q3 2020, according to a recent analysis by Redpoint’s Jamin Ball.

Astute readers will recall that The Exchange chatted with Ball after the Q2 earnings cycle, a conversation that included puzzling over how to square a nearly uniform deceleration in revenue growth from Q1 to Q2 in the software sector, which, at the very same time, was supposedly undergoing a boom in demand thanks to the pandemic and a suddenly remote workforce.

One hypothesis Ball offered was that deals signed in Q2 by SaaS companies would not show up much until Q3 if they were signed in the back-half of the quarter. Regardless of the reason, Q3 featured a far-stronger crop of cloud results that imply a strengthening sector.

For us startup watchers on the hunt for a hint of what is going on in opaque private markets, this is a useful data point. If you’ve been slightly befuddled as to why the venture capital space has seen deals accelerate with time-to-conviction falling from weeks to minutes — and pre-emption the new normal — this is part of the why.

As the future has been pulled forward when it comes to digitizing the American and global economies, it’s a good time to be a software company. This was visible in SaaS company Smartsheet’s earnings this quarter. The Exchange chatted with CEO Mark Mader about his company’s recent earnings results that beat expectations and led to the company’s shares rising. Analyst upgrades have followed.

This morning, let’s examine the data regarding how many cloud companies are seeing revenue growth accelerate, dig into Smartsheet’s results to see what we can learn (hint: SMBs matter), and then apply all our findings to the startup market itself so that we can go into the weekend as informed as possible.

Public acceleration

At the risk of being cheeky, I’ve embedded Ball’s chart concerning Q3 revenue acceleration from cloud companies below. (If you are into similar data sets, he’s worth following on Twitter.) Here’s the data:

Image: Jamin Ball

This chart shows Q2’s cloud year-over-year growth rates subtracted from Q3’s own; a result greater than one shows that a company’s year-over-year growth accelerated from the second quarter to the third. The higher the number of cloud companies that wind up with a result of 1% or greater in the above chart, the faster the cloud market as a whole is accelerating.