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Software-as-a-Service Stocks Save Nasdaq From Cisco Swoon

By Dan Caplinger – Aug 13, 2020 at 3:59PM

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The Nasdaq Composite avoided the declines other market benchmarks suffered.

The Nasdaq Composite (^IXIC) held up well on Thursday, keeping its big gains from Wednesday even as other major benchmarks gave up ground. At 3:30 p.m. EDT, the index was up 44 points to 11,055, while the Nasdaq-100 climbed higher by 36 points to 11,194.

Ordinarily, a 12% drop in shares of tech giant Cisco Systems (CSCO -0.66%) would have been enough to send the Nasdaq falling sharply. Yet elsewhere in technology, stocks of companies using software-as-a-service (SaaS) business models fared extremely well and offset some of Cisco's losses.

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Image source: Getty Images.

A SaaS-y market

Some of the best performers of 2020 were among those stocks posting solid gains today. Zoom Video Communications (ZM -5.05%) was up more than 4%, while data analytics company Datadog (DDOG -1.83%) climbed over 7%.

SaaS stocks had gotten hit hard recently, so part of today's bounce was simply a recognition of their intrinsic value. There's a lot of controversy about appropriate valuations for these young, fast-growing companies. Their shares have therefore been extremely volatile, enjoying solid overall gains but occasionally experiencing gut-wrenching declines. Overall, SaaS companies are faring well during the coronavirus pandemic, as digital innovation has forced businesses of all types and sizes to add to their tech capabilities. Zoom in particular has benefited from that trend, given the need for collaboration in an environment full of remote work.

Datadog's gains also stemmed from takeover rumors. Reports surfaced that SaaS pioneer salesforce.com (CRM 0.22%) might be looking at trying to buy Datadog, with speculation that an all-stock deal could be in the works. It makes sense that Salesforce might want to add greater data analytics capacity to its scope of business, but there could be some difficulty arriving at an agreeable price for a deal to take place. Salesforce shares moved higher by 1%, so investors don't seem to have a problem with the concept of a merger between the two companies.

Cisco falls

Tech giant Cisco Systems, however, didn't fare as well. The networking specialist released its fiscal fourth-quarter results, and although the numbers looked good, Cisco's forecast didn't satisfy its shareholders.

Cisco's key financial metrics did take a hit from the pandemic, but the impact wasn't severe. Revenue fell 9% year over year in the fiscal fourth quarter, and adjusted earnings per share were down 4% over the same period. As the 2020 fiscal year came to a close, Cisco boosted adjusted earnings 4% on a per-share basis while limiting declines in revenue to just 5%.

The problem, though, is that Cisco sees no end in sight to future challenges. Both revenue and earnings in the fiscal first quarter could drop double-digit percentages, which was a weaker outlook than most had hoped to see. That reflects heightened competition in the services and software segments, where the company has tried to make a transition in order to avoid relying on more volatile hardware sales.

Cisco is likely losing out on software and services revenue to SaaS specialists, and that could continue to be a problem going forward. With the retirement of its CFO adding to the challenges, Cisco doesn't look like a compelling investment proposition right now in the tech industry.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Datadog, Salesforce.com, and Zoom Video Communications and recommends the following options: short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cisco Systems Stock Quote
Cisco Systems
CSCO
$48.08 (-0.66%) $0.32
Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$71.59 (-5.05%) $-3.81
Datadog Stock Quote
Datadog
DDOG
$73.47 (-1.83%) $-1.37
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$153.69 (0.22%) $0.34
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$11,226.36 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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