🧠 Why Are SaaS Stocks Down Big?


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Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better.

Today's Issue Read Time: <3 minutes

  • Lesson: Why SaaS stocks plunged last week?
  • Timeless Content: Buffett's advice to his wife
  • Thread: Philip Fischer's checklist for buying a stock
  • Resource: Stock-based compensation explainer
  • And more!

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Friends,

This isn't turning out to be the summer that software-as-a-service (SaaS) bulls envisioned. As we highlighted a few weeks ago, chip-makers (NVIDIA) saw an immediate benefit from artificial intelligence (AI) following the release of ChatGPT. Big cloud companies (Amazon, Microsoft, Google) were soon to follow.

"Surely, the applications running AI will be next, right?" Right???

Based on first-quarter results, this has been precisely WRONG. Many companies actually met or beat revenue expectations for the quarter, but the forward-looking forecasts ruined everything.

The list was long -- Salesforce, UiPath, Veeva, MongoDB, and many others -- but they all shared one thing: either full-year guidance that was revised downward or fell significantly short of expectations.

How could this be? There are a few possible explanations:

  1. It needs time: Perhaps we've just gotten over-excited and AI-juiced data consumption is just around the corner.
  2. Spending elsewhere: As businesses try to take full advantage of AI, they may prioritize in-house projects. That leaves less to spend on current applications.
  3. No more moats: Similar to above, the ability for AI to make in-house apps via coding could reduce the moats SaaS companies have built down to zero. This isn't likely, but for the most basic applications, it could be a valid concern.
  4. Something else: An upcoming election, a looming recession, or maybe just the gravitational forces of the moon. Sometimes, it's impossible to tell why things unfold the way they do.

No matter the explanation, it reminds us of an important lesson: the future is NOT guaranteed. How do we navigate this realization: make sure you've got lots of cash sitting on the sidelines, live well below your means, and approach the markets with an open mind.

Do that and, over the long run, you can weather these unpleasant surprises with much more grace and ease than you might expect.

- Brian Feroldi, Brian Stoffel, & Brian Withers


One Simple Graphic:


One Piece of Timeless Content:

Warren Buffett is a brilliant investor, and many copy his methods. But you might be surprised to hear his investing advice to his wife.


One Thread:


One Resource:

Silicon Valley loves to pay its employees with stock-based compensation (or SBC for short). But, SBC is not as motivational as some might have you believe. Check out this data-filled report on SBC practices from Morgan Stanley analyst Michael J. Mauboussin.


One Quote:


πŸ‘‹ What did you think of today's newsletter?

β€‹πŸ§ πŸ§ πŸ§ πŸ§ πŸ§  It was awesome!​

β€‹πŸ§ πŸ§ πŸ§  It was OK​

β€‹πŸ§  Do better​


More From Us:

πŸ“— If you've read Brian Feroldi's book, he'd love a review.

πŸ‘¨β€πŸŽ“ Interested in learning to read financial statements like Warren Buffett? Check out our self-paced course, The Buffett Method.

🎬 Check out our YouTube channel! Last week, Brian Stoffel covered why SaaS stocks are pulling back and Why he sold Crowdstrike.


Long-Term Mindset

I teach investors how to analyze businesses. Each Wednesday, I share six pieces of timeless content that can be read in less than 2 minutes. Read by 100,000+ investors from a16z, Amazon, Google, Microsoft, and more.

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