Baird lowers estimates for software, SAAS stocks, says ServiceNow is most at risk

On Thursday, Baird analysts lowered their estimates for software and SAAS stocks to reflect concerns about the impact of COVID-19. While peers Salesforce and Adobe will likely be impacted by slower large-deal activity with enterprises, the firm lays out the case why ServiceNow is most at risk.

Video Transcript

JEN ROGERS: Let's get to our Call of the Day right now. It's ServiceNow, cut to neutral from outperform at Baird. Took the price target to $300 from $365.

So what's interesting in this note-- and they touch on a couple of names in the SAAS space-- is that when this whole pandemic and the crisis first started, we focused so much on companies that were obviously hit by people sheltering in place, so your hotels and airlines and the cruise ships. Now we're getting to these sort of knock-on effects, and people are trying to figure out what's happening with tech and with SAAS.

And, Myles, what I kind of took away from here is that nothing is immune, even a company like a ServiceNow where, as they make the point in the Baird note, OK, it's hard to start and stop projects. Things seem to be going OK now. CapEx is going to be cut, really across the board. And that does hit every company, even something in maybe what you would think would be a safer space.

MYLES UDLAND: Yeah, I mean, as we've talked about in the last few weeks, and we're probably going to be talking about for the next several months, recessions change everything, right. They change consumer behavior, they change executive behavior, they change expectations.

You know, the way that companies build out those CapEx plans is based on where they think, you know, trend growth broadly might be headed, whether it's in the economy or in their industry. And so, you know, obviously the SAAS plays are very buzzy because of how their stocks have performed over the last 18 months or so, but they're really not facing a challenge that is all that different than basically every other company.

I mean the acute challenges we're going to spend most of our time discussing are going to be restaurants, airlines, hotels, all that kind of stuff. But you know, regular businesses that are just minding their own business, as it were, are also going to be affected by a recession, because that's just what the environment kind of calls for. That's what happens during downturns as everyone takes a look at everything.

And you know, yeah, basically the note, you know, kind of boils down to, well, ServiceNow's trading two times more expensive than Salesforce, and in this environment, that's not likely to hold. So sure, an evaluation call, you know, not super complicated.

But I think the broader point here is that every company faces challenges because it's a recession, because companies are looking at things differently. And while that doesn't have to result in it being a negative for your business, it's just a different operating environment.

When you go into a meeting or you have another renewal meeting with a customer, they're thinking about the world a lot differently now. And they're going to be thinking about the world a lot differently in September of 2020 than they were when you held that meeting, let's say, March 2019 when we had gotten past the sell-off, and the Fed was easy, and it seemed like everything was going to be fine.

JEN ROGERS: Yeah, and on that valuation note, I think it is important, especially for some of these SAAS names that-- look, back in January, these names-- well, they've come down some. But things were priced pretty well. And also, your valuation to your peers, that's going to come into play here as well.

Dan Roberts, another thing that stood out to me in this note was just the timeline, which we've been hearing repeatedly, but May being like-- the bearish scenario here for this note in terms of what they they're looking at, they really need stuff under control by May. They do not want to head into the summer with questions.

DAN ROBERTS: Well, and that's unlikely to happen, isn't it? I mean, you know, we keep using this caveat on every show every day, I am not a medical expert. But the timeline sure looks like it's getting extended, you know, more and more and more. The goalposts keep moving.

So it doesn't look like anything's going to be back to normal by May. I mean, I think the misconception that a lot of people had three weeks ago-- and everything is changing so quickly-- is that, well, once it peaks, once the cases peak, then we're OK. But even long after the peak, we're going to have to stay indoors and do social distancing.

Now what's interesting to me about this note, Baird mentions slower large deal activity for enterprises. And they add to that and say, you know, it's going to be fewer projects, any big deals that are around enterprise projects. That make sense.

And it's a reminder that there's been, you know, sort of a take people have that a lot of tech is just fine and dandy during this, because if it's tech and it's in the cloud, all good. Don't worry.

Well, that is not the case. I mean, for ServiceNow, as Myles mentioned, they have costs. So you know, CapEx is affected, capital spend. And then also, if you are a company right now, yes, you might be using the various enterprise software tools you use more-- I mean, everyone's on Slack, everyone's on Zoom. ServiceNow might be an example, since it's cloud-- but also, you might be doing less in certain areas.

I mean, another kind of example that I think a lot of people hadn't thought of as consulting. What are the McKinseys of the world and the Deloittes thinking right now? Because what if certain clients that usually have the money to pay to hire extra consultants for various projects say, wait, a minute, we can't have consultants right now. We're barely hanging on. So ServiceNow an example of being affected in that way.

JEN ROGERS: So many knock-on effects here. I think it was also exhibited in the jobless claims earlier today, of states that don't even have outbreaks along the lines of what we're seeing in New York having huge hits to their labor market. Again some of the dislocations playing out.