A Recession Isn't Guaranteed But We Are Still in Strange Times: SaaS Companies Pay Attention

A Recession Isn't Guaranteed But We Are Still in Strange Times: SaaS Companies Pay Attention

ALMOST all the things that are happening in the economy right now are still the lingering impacts of COVID.

The two that are not:

- Oil Prices

- War in Ukraine and effects on energy and other supplies

These other things are:

* How to come back from pumping too much money in the economy? Higher Interest rates!

* Inventory levels up because the last round of buying happened before inflation fears set in. This has increased discounting and liquidation and depressed margins.

* How to compete with many workers retiring due to COVID disruption (among other factors)? Raise wages. This tends to increase inflation.

* Cost of labor goes up. Which increases the inputs to a lot of goods and services. This raises prices/inflation.

* What happens when interest rates go up? Overheated sectors go down, price-to-earnings valuations fall (whether you are priced at a multiple of revenue or EBIT or FCF, it's all falling).

* Meanwhile, housing prices which spiked during COVID got too expensive, despite the fact that there is still not enough supply for the number of people looking.

So more people than houses.

* Consumer debt not looking so bad really. It's about pre-COVID. So the consumer is not in trouble, which would really point more to a harder recession if it were.

* On the other hand, there are still 1.7 jobs for every person looking. Which tends to raise prices of labor. Which tends to raise inflation.

But if valuations fall, then hiring falls in overheated sectors, so this can correct.

All this means that consumers are still buying, but their pricing power is reduced and they can't afford all the things they used to. In response they are l also trading down.l to make their spending go farther.

Companies also can't hire the same number of people because the cost of capital is more expensive. This means either layoffs or holding pat on hiring.

The biggest impact of this that no one is talking about?

The impact on SaaS vendors. It's not just consumers that are trading down, it's companies.

Most SaaS vendors are starting to get the picture that revenue and per-seat retention of SaaS contracts is under a lot of pressure. Meaning companies will evaluate if they need to use your product AS MUCH next year. Not that they will cancel, but if they have 40 seats, they will look at if they could get by with 30. On top of that, they aren't hiring 25 more people. This is happening to AWS as well.

As if SaaS founders needed something else to worry about than reduced valuations and higher cost of capital.

So SaaS vendors should be prepared for the bullwhip in 2023 is my point. You are up next.