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PaaS: How PaaS Impacts the Stock Prices of SaaS Companies

Posted on Wednesday, Jan 29th 2020

I assume you have been reading my commentary on Platform-as-a-Service (PaaS). 

To recap, in SaaS Companies: You Have An Unprecedented Opportunity, I started highlighting the massive momentum in Cloud Stocks exactly two years back.

In Cloud Stocks: SaaS Companies NEED PaaS Strategy and Cloud Stocks: Calling ALL PaaS Leaders, I pointed out how PaaS is a key strategic tool in building leverage for SaaS companies.

And at the end of 2019, I published Cloud Stocks: Top 20 for 2020 with a summary of which SaaS companies are succeeding on the basis of a strong PaaS strategy. Salesforce.com (NYSE: CRM), Microsoft (Nasdaq: MSFT), Amazon (NASDAQ: AMZN), Atlassian (NASDAQ: TEAM), ServiceNow (NYSE: NOW) – all featured on this list.

Recently, I also published a thorough review of Atlassian’s excellent PaaS strategy: Cloud Stocks: Atlassian has a Strong Start in 2020.

Atlassian’s Marketplace has reached massive scale, recently surpassing $1 billion in lifetime sales. It is now one of the largest enterprise software marketplaces alongside AWS and Salesforce. To boost its efforts, Atlassian in December announced Forge, its new cloud app development platform. Forge is expected to increase the number of third-party cloud apps available on the Marketplace, creating more value for cloud customers. There are currently over 4,000 apps available on the Marketplace. In addition, developers have built 28,000 apps for their in-house teams. Across Jira Software and Confluence, over 60% of customer instances use at least one Marketplace app.

Let’s analyze the PaaS opportunity with some examples.

The beauty of the model that Salesforce.com introduced with their PaaS and AppExchange marketplace lies in the leveraged multiplier effect of developers writing apps on their platform, selling to their customers through the marketplace, and paying platform/marketplace fees of ~30%. The model is no different from Apple’s App Store.

Some numbers: Let us say, a SaaS platform vendor succeeds in facilitating 100 small companies to achieve $10M in ARR each. That would add up to $1 billion ARR cumulative. 30% of this, or $300 million ARR comes back to the company as platform fees. This, conceivably, amounts to a $3 billion market cap enhancement for the PaaS vendor.

If you look under the hood, Salesforce.com’s $160 billion market cap attributes a large component to this type of revenue.

Atlassian is trying to take a page out of this playbook. If the company can make its $36 billion market cap amplify by adding several billions through entrepreneurs developing on their PaaS, the stock goes to the stratosphere.

ServiceNow is also trying to do a comprehensive PaaS strategy. However, it is emphasizing large system integrators, not smaller startups. The business model, therefore, is somewhat different. I would have preferred to ALSO see ServiceNow preserve a strong commitment to the startup ecosystem, not just on large SIs. Let us see if that happens in the next rev of their strategy.

Overall, I am bullish on those PaaS players who are building strong developer ecosystems and facilitating the small business sector decisively.

Companies like Shopify have such initiatives in the ecommerce platform space. Competitors BigCommerce and Wix would do well to emulate.

Intuit, with millions of customers, should be able to amplify its $75 billion market cap greatly by emphasizing a PaaS strategy.

Workday and ServiceNow should as well.

Splunk, Alteryx, Twilio, MongoDB are all platform vendors well-positioned to do great PaaS strategies.

Zendesk, Hubspot, Bill.com and several others need to consider how to play in this space.

Cloud Stock Analysts need to start analyzing what percentage of the revenue/market cap of the stocks they cover are based on PaaS commissions. It would give them substantial insights into the long term prospects of the equities under consideration.

And CFOs of SaaS companies need to start reporting PaaS revenues separately and provide guidance on when such revenue may hit the exponential growth curve.

In summary, PaaS, today, is poorly understood, inadequately reported, badly strategized, and woefully underemphasized.

This needs to change.

Related Reading: Bootstrapping by Piggybacking

Photo by AC Almelor on Unsplash

This segment is a part in the series : PaaS

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