Is business software too cheap?

It’s been a week of mixed results for the software technology world: GitLab, Box, Yext and Asana reported their third-quarter results in the past few days, and not all of them did well.

GitLab is the clear winner of the week. The company beat expectations for both revenue and profit, and posted its first adjusted operating profit since its IPO. Investors were understandably very pleased with the company’s revenue rising 32%, gross margins of 90%, and net retention of 128%: GitLab’s market cap increased by almost a billion dollars to $9.18 billion the day after its Q3 results, per YCharts.

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Other software companies have not had similar amounts of fun. Box’s shares are down 8.6% after it missed analysts’ estimates for revenue in the third quarter and forecast modest revenue growth in its next fiscal year; Asana reported better-than-expected revenue and profit in Q3, but its shares are down more than 13% due to concerns over its revenue growth forecast. And Yext’s stock took body blows this morning, plummeting more than 20% after the company missed analysts’ expectations for revenue in Q3 and cut its revenue forecast for the rest of its current fiscal year.

The picture that emerges is one of contrasts: Some tech companies are doing well, but there’s still a lot of pain in the market.

The good news is that at least through last week, aggregated software earnings data showed an uptick in median net-new annual recurring revenue (ARR) growth, measured on a year-over-year basis. After falling below zero for four quarters, median net-new ARR growth is back in the black, picking up by 3%, according to Altimeter investor Jamin Ball. That’s not much, but it does underscore why there’s good reason to expect calendar 2024 to be slightly less difficult for software companies.

But some good vibes are not enough to shelter the short-term value of these software companies. After all, they have scaled, serve enterprise customers, built sophisticated sales teams, and are now offering AI-related features to entice new buyers and retain prior accounts. You would think they would be doing better than they are, given the economy is pretty strong in some ways, or that they would be able to raise prices and better defend their growth rates.

This leads us to a question: Why is business software trading so cheaply? Or, put another way, is business software underpriced?

CAC, payback and perfect competition


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