Clouded Judgement 10.13.23 - 2024 Budget Expectations

Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!

August Inflation Update

We got August inflation this week, here’s where it came in:

Headline CPI 3.7% YoY vs +3.6% consensus and +3.7% YoY in Aug

Core CPI 4.1% YoY vs +4.1% consensus and +4.3% in Aug

Morgan Stanley CIO Survey

Morgan Stanley came out with their quarterly CIO survey, and I wanted to highlight some points they made. Most notably, there is some optimism of IT budgets expanding faster next year. Their survey suggests that IT budgets will grow 3.4% next year, up from 2.7% growth in 2023. It’s worthwile to call out that historically IT budgets have grown ~4% / year. So while it’s good to see broth expectations pick up for 2024, the current expectations would still be below the long term annual growth average. In the short term, however, there does seem to still be pressure on budgets. They measure a ratio called the “up-to-down ratio” that looks at # of CIOs who expect to revise budgest higher / revise lower. A number >1x is good - this means more expect to revise higher than lower. The one year outlook today (ie predictions for budget revisions 1 year out) is 0.5x, which means more CIOs expect to revise budgets down further. When they did a 3 year look forward (instead of 1 year), that ratio jumped to 6.3x! So long term there’s lots of optimism for budget growth, and short term people are still cautious. Some of the optimism for longer term budget growth comes from AI/LLM spend.

The chart below shows the evolution of this Up-To-Down quarterly ratio for the last few years

Top 10 EV / NTM Revenue Multiples

Top 10 Weekly Share Price Movement

Update on Multiples

SaaS businesses are generally valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Revenue multiples are a shorthand valuation framework. Given most software companies are not profitable, or not generating meaningful FCF, it’s the only metric to compare the entire industry against. Even a DCF is riddled with long term assumptions. The promise of SaaS is that growth in the early years leads to profits in the mature years. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue.

Overall Stats:

• Overall Median: 5.5x

• Top 5 Median: 14.6x

• 10Y: 4.7%

Bucketed by Growth. In the buckets below I consider high growth >30% projected NTM growth, mid growth 15%-30% and low growth <15%

• High Growth Median: 12.3x

• Mid Growth Median: 8.5x

• Low Growth Median: 3.7x

EV / NTM Rev / NTM Growth

The below chart shows the EV / NTM revenue multiple divided by NTM consensus growth expectations. So a company trading at 20x NTM revenue that is projected to grow 100% would be trading at 0.2x. The goal of this graph is to show how relatively cheap / expensive each stock is relative to their growth expectations

EV / NTM FCF

The line chart shows the median of all companies with a FCF multiple >0x and <100x. I created this subset to show companies where FCF is a relevant valuation metric.

Companies with negative NTM FCF are not listed on the chart

Scatter Plot of EV / NTM Rev Multiple vs NTM Rev Growth

How correlated is growth to valuation multiple?

Operating Metrics

• Median NTM growth rate: 15%

• Median LTM growth rate: 21%

• Median Gross Margin: 75%

• Median Operating Margin (17%)

• Median FCF Margin: 7%

• Median Net Retention: 114%

• Median CAC Payback: 35 months

• Median S&M % Revenue: 42%

• Median R&D % Revenue: 27%

• Median G&A % Revenue: 16%

Comps Output

Rule of 40 shows rev growth + FCF margin (both LTM and NTM for growth + margins). FCF calculated as Cash Flow from Operations - Capital Expenditures

GM Adjusted Payback is calculated as: (Previous Q S&M) / (Net New ARR in Q x Gross Margin) x 12 . It shows the number of months it takes for a SaaS business to payback their fully burdened CAC on a gross profit basis. Most public companies don’t report net new ARR, so I’m taking an implied ARR metric (quarterly subscription revenue x 4). Net new ARR is simply the ARR of the current quarter, minus the ARR of the previous quarter. Companies that do not disclose subscription rev have been left out of the analysis and are listed as NA.

Sources used in this post include Bloomberg, Pitchbook and company filings

The information presented in this newsletter is the opinion of the author and does not necessarily reflect the view of any other person or entity, including Altimeter Capital Management, LP ("Altimeter").  The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies.  This is for information purposes and should not be construed as an investment recommendation.  Past performance is no guarantee of future performance.  Altimeter is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. 

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