Drivers of Share Price Movements When Earnings are Negative: A Study on SaaS Companies

Abstract: This paper examines the drivers of share price movements for Software-as-a-Service (SaaS) companies for the period 2014-2019 by including financial fundamentals and valuation multiples in a regression analysis. The primary purpose of this paper is to provide valuable findings for practitioners to base their investment decisions upon when investing in SaaS companies. We run ten regressions, divided into three OLS regression models, three fixed effects regression models and four additional OLS regression models with different datasets to test the robustness of our findings. The dependent variable is share price and the independent variables are the following: sales, EBITDA margin, earnings per share, free cash flow, EV/Sales, P/BV, an annual time dummy variable, a firm size dummy variable and a firm-specific dummy variable. The findings show that sales and the EV/Sales ratio are significantly correlated with the share price movements. Indicating that both financial fundamentals and the investor sentiment has driven the strong performance of the dataset during the five-year period. Whereas the latter could be driven by either higher expectations on future cash flows or a lower discount rate when discounting future cash flows.