Clouded Judgement 10.7.22

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

High FCF Businesses

Every week I post a chart that shows the correlation between revenue growth and revenue multiple. Since the market started correcting that correlation broke down (the R^2 is currently 0.49). However, if we only look at software companies with >15% LTM FCF margins, the correlation is actually quite high. The chart below only graphs cloud software businesses with >15% LTM FCF margins, and as you can see the R^2 is 0.85 (which is quite high for this kind of correlation). The sample set has 23 companies in it. What does this tell us? For the “good” businesses, growth is still king when determining a businesses multiple. Intuitively this make sense, especially for longer duration / growth assets. Becoming a “good businesses” is an important binary and not an easy feat.

High Growth Strength

When looking at how software multiples have trended over the last couple months, the high growth cohort has fared quite well. The current median multiple is 12% above its summer lows, however the high growth median multiple is 78% above its summer lows. The chart below shows the multiples broken down by high, mid and low growth. The dotted lines are the lows - as you can tell the blue line is much higher than the blue dotted line (moreso than the orange and grey lines)

Top 10 EV / NTM Revenue Multiples

Top 10 Weekly Share Price Movement

Update on Multiples

SaaS businesses are valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue.

Overall Stats:

• Overall Median: 5.9x

• Top 5 Median: 17.0x

• 10Y: 3.8%

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: 6.2x

• Low Growth Median: 3.3x

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

How correlated is growth to valuation multiple?

Growth Adjusted EV / NTM Rev

The below chart shows the EV / NTM revenue multiple divided by NTM consensus growth expectations. The goal of this graph is to show how relatively cheap / expensive each stock is relative to their growth expectations

Operating Metrics

• Median NTM growth rate: 21%

• Median LTM growth rate: 30%

• Median Gross Margin: 74%

• Median Operating Margin (25%)

• Median FCF Margin: 0%

• Median Net Retention: 120%

• Median CAC Payback: 33 months

• Median S&M % Revenue: 48%

• Median R&D % Revenue: 28%

• Median G&A % Revenue: 20%

Comps Output

Rule of 40 shows LTM growth rate + LTM FCF Margin. 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.

This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of his employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author and all employers and their affiliated persons assume no liability for this information and no obligation to update the information or analysis contained herein in the future.