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.
Adobe looking cheap?
The current median multiple is 12% above its summer lows, however the high growth median multiple is 78% above its summer lows.
Just wondering, why is that?
Great analysis, thanks for sharing Jamin.