Cloud service provider Snowflake Inc, which is expected to list on the New York Stock Exchange next week, is one of the most anticipated IPO in the technology sector this year, with Buffett's Berkshire Hathaway and software giant Salesforce.com Inc holding $250 million each.

Buffett, who has rarely invested in technology stocks in the past, has said Berkshire has not bought newly issued shares in the past 54 years, and the entry of the technology stock IPO is rare. Buffett's investment in Snowflake Inc is actually bullish on the field of cloud computing.

In recent years, with the continuous improvement of cloud computing penetration, the SaaS industry in the United States has become more mature, platform-level ecology has been formed, and more and more business processes have been moved online. At the same time, with the penetration of new technologies and concepts such as micro-services and agile development, the development cost has dropped significantly, and SaaS, which is in line with the new technology and new model, has grown rapidly.

The epidemic has also pushed up demand for telecommuting SaaS. The popularity of teleconferencing communication software Zoom is the best example. It is understood that in the first three months of this year, the global use of Zoom soared 20-fold, with the highest number of daily users reaching 10 million, but the highest number of daily users during the epidemic exceeded 200 million, and Zoom Video Communications Inc's share price has soared more than 470% so far this year.

According to Accenture PLC's follow-up survey of nearly 1000 CEO, after the outbreak, the focus of CEO investment is not only cloud technology, but also cloud technology. The number of companies looking to invest more in cloud technology has increased by 26 percent in two months, according to the survey. Before the outbreak, most companies were just talking about moving their business to the cloud, but now they have moved quickly.

What is the current penetration rate of the cloud computing industry in the United States? Compared with China, the penetration of cloud computing in the United States has been more than half, and the cloud environment within the enterprise is also moving towards cloudy. According to the hybrid cloud architecture adopted by 69% of enterprises in the year of Rightscale,2019, the average enterprise uses 4.9 clouds. The widespread adoption of cloud computing and cloudy environment have given rise to new requirements for SaaS applications.

But now the valuations of many SaaS companies are not low, and there are many companies with an EV/Sales of more than 20 times in the IT sector of the US stock market. Financially, what these companies have in common isHigher than about 30% income growth and the potential ability to reach a net interest rate of 20-30%。

What underpins SaaS's high valuation?

At the business level, Oriental Securities points out that overseas high-valued SaaS companies have three obvious things in common:1) the track you are inThere is plenty of room for growth2) have network effect; 3) use innovative sales strategy to ensure profitability.

Oriental Securities pointed out that the valuation of SaaS depends on sustainable growth and potential profitability, that is, the higher the company's "expected revenue growth plus expected profit margin", the higher the SaaS company deserves a higher valuation.

There is a popular "40 rule" in the VC industry in the United States, that is, when a company's revenue growth + profit margin is more than 40%, then the company is well worth investing, and if this value reaches 50% or 60%, it can often be highly valued. This also reflects the importance of these two indicators for SaaS valuation.

Network effect ensures the sustainability of growth

Under the background of the giants surroundingSaaS needs to quickly acquire network effects to ensure sustainable growth.. Companies with strong network effects have higher competition barriers and higher valuation levels under the same conditions.

Oriental Securities lists several examples:

• DocuSign is still in an invincible position under the competition of Adobe Inc, which is related to the network effect of the electronic contract track.

• Under the competition of the giant Microsoft Corp Active Directory, Okta has formed a network effect by virtue of its neutrality and first-mover advantage, and has become the largest company with market capitalization in the field of zero trust.

• Coupa also faces competition from the giant SAP Ariba and is also a late entrant to the market, but it forms barriers and continues to become bigger and stronger through a higher degree of standardization of non-productive procurement.

• The audio and video application of Zoom is a model of network effect, which rises rapidly by virtue of user experience in the small and medium-sized customer market ignored by the giants, thus weaving the web.

• Relatively speaking, because the network effect of Slack is not strong enough, the number of its users is quickly overtaken by the latecomer Microsoft Corp Teams. Due to the uncertainty of competition, the valuation level is suppressed, and EV/S drops to less than 20 times.

On the other handCompanies that form network benefits are more likely to cut into transactions, thus opening the revenue ceiling and achieving higher valuations., such as Shopify Inc and Coupa.

Oriental Securities believes that from SaaS to trading, it is essentially the realization of bargaining power and network effect. Shopify Inc is a non-typical SaaS company. With the gradual development of its business, the proportion of its merchants' value-added services income is getting higher and higher, and it is more and more dependent on the overall GMV level of merchants to share, so its income ceiling is high. Benefiting from the outbreak of private domain traffic and the further improvement of the online purchase penetration rate of the epidemic, the company's valuation level continues to improve, which has ranked first.

Coupa mainly manages enterprise expenses, and there are more than 1 trillion transaction streams on its platform. In the future, it is expected to cash the transaction streams through Coupa Pay and other companies (competitor Ariba has already begun to cash the transaction streams). The high valuation of the company also includes market expectations for this part of the company.

How to break the spell of high cost of sales?

Sales expenses are the bulk of the cost of SaaS. Oriental Securities pointed out that the high rate of sales expenses is the curse that it is difficult for traditional SaaS companies to make a profit. However, with the increase in SaaS penetration and the formation of customer usage habits, the "new generation" of SaaS has reduced sales costs through a new sales model.

As can be seen from the data, Salesforce.com Inc's sales expense rate has exceeded 40% for a long time. Even after the company has developed for many years, the narrowing range of sales expenses is still limited, facing the curse of growth and profitability at the same time.

In order to reduce the rate of sales expenses, we need to start with changing the way of sales. Traditional software manufacturers rely on distribution channels. 80% of Coupa's revenue comes from distribution channels, which embedded an expense reimbursement module in Salesforce.com Inc's products in 2010, and Salesforce.com Inc has become an important sales channel for the company.

In recent years, with the increasing maturity of SaaS industry ecology, customers' acceptance of SaaS is getting higher and higher, and the difficulty of product delivery under SaaS mode is reduced, the cycle is shortened, and the pricing is relatively low. Many companies begin to adopt the sales model of "direct sales + online sales". There are also some product companies that adopt new sales methods, such as alliance sales through open API initiative and other SaaS integrated products, or "Free+Prime" Internet promotion model.

Zoom provides a free trial through "Free+Prime", lowering the threshold for use, and then 2C word-of-mouth to influence the ordering decision of 2B, which is conducive to reducing sales costs. Fifty-five per cent of corporate customers who pay more than $100000 started with the free version.

According to the latest results, Zoom's total revenue in the second quarter was $664 million, up 3.55 times year-on-year, while net profit attributable to the company's common shareholders was $186 million, up 32.6 times year-on-year. Without GAAP, Zoom's second-quarter revenue was $277 million, up nearly 12.4 times year-on-year, and net profit was $275 million, up 10.4 times year-on-year. It is worth noting that while the income has soared,The sales expense rate of Zoom in the second quarter was about 24%, down sharply from 54.6% in the same period last year, and was one of the main reasons for the increase in net profit.

Atlassian can be said to be a model of "No Sales". At the beginning of its establishment, the company did not have a sales staff, but by putting its products online, through free trials and low-price strategies to pay for conversion. The company adopts the mode of drive + online sales (supplemented by channel distribution), which saves sales costs under the condition of ensuring product power, which makes the company's FCF Margin33% and profitability better than other SaaS companies, which is also one of the reasons why the company enjoys high valuation.

Domestic SaaS companies are still in the stage of cloud transformation.

At present, there are not many SaaS companies listed in China, and most of SaaS companies are still in the stage of cloud transformation, and the proportion of cloud business revenue is still relatively small. But we can discuss the domestic SaaS company from the common point of view of the overseas high valuation SaaS company.

According to the logical framework of financial characteristics (growth and profitability) and the logical framework of business characteristics (track / ceiling, network effect, sales model), Oriental Securities believes thatJinshan Office has excellent performance in various indicators; Guanglianda has high-quality development in the vertical field; Yuyou and Kingdee have a large market space, but it still needs to be developed in network effect and sales innovation.