PEST

As described in chapter 3, the PEST-acronym offers a widely accepted method of categorizing external factors that influence firm performance. Following this procedure, the upcoming sections provide a summary of the most crucial political, economic, sociocultural and technological factors that impact the SaaS-industry.

4.2.1 Political

Following Joe Biden’s victory in the US election of 2020, Silicon Valley’s tech leaders have braced for tougher regulation from the new president’s administration (Romm, et al., 2021). Although COVID-19 has made tech more central to daily lives, it has also exposed inequalities that the Biden and Harris administration must face (Ibid). For instance, millions of gig workers, who are often connected to potential jobs through tech platforms, do not receive the benefits that come along with officially being considered full-time employees. In addition, the pandemic has underlined the problems and inequalities associated with millions of Americans not having access to the high-speed internet connections that have proved essential for school and several jobs. Democratic leaders have proposed a vast number of new legislative actions in order to shrink Silicon Valley’s corporate footprint for years, and with the Democrats now controlling the House and the Senate, passing such bills will be met with less resistance. Stock markets reflect this fear of regulatory scrutiny through a widespread fall in tech-stock prices following the Democrats’ majority-securing

51 win in the Senate election (Ponciano, 2021). Another one of Biden’s key tech-related priorities is to expand broadband access in order to tackle the digital divide (Ibid), likely expanding the SaaS-market. The exact effects of such political changes remain uncertain but shifts in the competitive landscape seem inevitable.

The turbulent relationship a between the US and China and subsequent trade war has represented one of the biggest risks to technology stocks in the last few years. Fox (2021) claims that the Biden administration has taken a much firmer stance against China than Wall Street had anticipated, and tech stocks from both countries find themselves in the middle of the crossfire. The key issue remains the potential delisting of Chinese stocks from US stock exchanges, with the Democrats having moved forward with a law that would force Chinese companies to allow reviews from US auditors, or face delisting (Fox, 2021). China arguably still has leverage in the dispute however, with several US companies sourcing both demand for their products and services, as well as much of their supply chains in China. Retaliation from President Xi and his cabinet can therefore have detrimental effects on US tech companies, including the ones in our analysis.

4.2.2 Economic

Both consumer and business spending are to a large degree determined by macroeconomic factors such as GDP growth, unemployment rates, interest rates and economic cycles. These underlying indicators thus help describe the economic landscape our SaaS companies operate in, and ultimately how this impacts the industry attractiveness. It is evident that the COVID-19 pandemic has created an economy with unique characteristics that deviate from expectations and historical developments. For instance, the US economy contracted by -4,2% year-on-year in 2020 as a result of the severe decrease in economic activity (MarketLine, 2021). Contextualizing this decrease, annual GDP growth in the USA has been fairly steady in the last decade, ranging between 1,5%

and 3,0% (Ibid). Although the economy is clearly on a path to recovery, the pace of the recovery is still largely dependent on the future spread of the virus, potential mutations and efficiency of vaccinations.

Another fundamental that describes the damage caused by the corona-outbreak is the unemployment rate. In the years following the financial crisis of 2007-2008, the US unemployment rate has continuously decreased from 9,61% in 2010 to 3,67% in 2019. However, lockdown

52 processes and uncertainty caused by the pandemic bumped this figure to 8,1% in 2020 (MarketLine, 2021). Assuming a successful vaccination program and subsequent economic rebound, unemployment rates are expected to remain around 5,5% between 2021-2024 (Ibid), indicating a forecasted return to normality in the near future.

In order to combat the roadblocks for economic activity created by social distancing measures, the US government immediately established a COVID-19 stimulus response plan in March of 2020.

Between then and time of writing (February 2021) stimulus packages worth USD 4,9 trillion have been allocated in order to support the economy (MarketLine, 2021). Such measures provided much needed relief to the economy and helped limit the damage by for example preventing bankruptcies, homelessness and supporting people with purchasing necessary items. As of February 2021, the Biden administration is developing another stimulus package with an estimated worth of USD 1,9 trillion.

Finally, tech stocks have proved to be extremely sensitive to changes in interest rates (Pisani, 2021). With several large-cap tech stocks in correction, Pisani attributes their fall to an expected increase in interest rates. With interest rates at an all-time low, several investors fear that an increase is inevitable. Higher interest rates translate into lower discount factors in the DCF models used on Wall Street and ultimately lower present values of predicted discounted cash flows (all else equal). The impact becomes even more visible when dealing with high-growth equities such as the ones we study since a rise in rates would take an even larger chunk out of the present value of the investment. This partially explains the surge of growth stock prices during the pandemic, but also indicates a certain fear in the market and worries that interest rates will shoot up without the Federal Reserve being able to control it (Pisani, 2021). This uncertainty about future interest rates underlines why we believe sensitivity analyses represent a crucial tool for this project and the discussion regarding the paper’s research question.

4.2.3 Sociocultural

The spread of the coronavirus has changed the way in which we work, socialize and just about every other aspect of life. For most, working from home has become the norm and travel has become extremely restricted and close to eliminated for some. Living under such restrictions for over a year was always bound to have a damaging effect on the global economy. A decrease in

53 purchasing power and the demand for non-essential items came as no surprise. Contrary to most sectors however, SaaS companies seem to have benefitted from the (forced) changes in consumer behavior and business operations and thus partially overcome the economic challenges brought on by the pandemic.

Remote working is one of the primary drivers behind the success of cloud-based services as they have kept the world running during the pandemic and could lead to fundamental changes to how the world works. The longevity of the pandemic has led to a transition from organizations being averse to the prospect of employees working from home to them being forced to embrace the idea.

Worldwide lockdowns have led to record level adoption of cloud-based collaboration tools. For example, Teams (Microsoft) hit a new daily record of 2.7 billion meeting minutes on March 31^st, 2020, which was twice as many as the number from two weeks earlier.

Statista’s (2021) report paints a similar story regarding the impact COVID-19 has on expected spending on SaaS. In a survey with 631 respondents (representatives from major enterprises), the majority expects their firm’s spending on cybersecurity, hybrid or multi-cloud, automation, smart analytics and AI to increase as a result of the pandemic as seen in Figure 6. The potential of remote working becoming a permanent possibility is seen as a driver for these investments, as working from home is no longer considered a temporary, short-term solution.

Figure 6: COVID 19's Expected Impact on Spending Source: Statista (2021)

54 4.2.4 Technological

Large-scale technological advancements are continuously making software-related products and services more accessible to the general public. As previously mentioned, the COVID-19 pandemic has forced businesses (and people in general) to rethink operational procedures. The need for low human contact whilst performing essential everyday tasks in high-contact sectors such as retail and hospitality has led to innovative solutions (MarketLine, 2021). For example, robotics has replaced manual workers in parts of the restaurant business, and e-commerce has resulted in a lower need for cashiers and helpers in the retail sectors. Subsequently, the required skillset required by such businesses has changed drastically, leaving many low-skilled workers unemployed as a result of this automation process. This digitalization process has been progressing for some years, but drastically accelerated as a result of the pandemic. For SaaS-companies, this is good news and translates into increased demand for products and services in the industry.

The value forecast of the North American software market illustrates this transition, with an expected increase of 39,5% within the next five years. This increase from the current market value of USD 213,8 billion in 2020 to USD 298,2 billion in 2025 translates into a compounded annual growth rate of 6,9% (MarketLine, 2021). Some of the leading players in the industry have decided to collaborate and form partnerships in order to satisfy this rapidly increasing demand. Such strategic partnerships allow the various players to leverage and complement each firm’s core technological competencies and thus provide streamlined products and services through technology consolidation and operational efficiency (Ibid). For example, Microsoft has teamed up with SAP, announcing plans to integrate Microsoft Teams with SAP’s intelligent suite of solutions.

The corporate objective with this collaboration is to accelerate the adoption of SAP’s enterprise resource planning (ERP) systems on Microsoft’s cloud computing service Azure. In turn, this can facilitate innovation, increase employee productivity and engagement, deliver collaborative learning and support global growth (Ibid).

The technological development also indirectly poses a threat to SaaS companies through their vulnerability to cybercrime. Cybersecurity has emerged as a product feature of competition among firms in the software industry as such security breaches could be major threats to companies involved in maintaining and transmitting private information (MarketLine, 2021). Managing this susceptibility to hackers, computer viruses and other related issues is costly, but failure to provide

55 secure solutions to customers will inevitably have severely negative effects on customer satisfaction, market share and stock price.