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Clouded Judgement 1.14.22
Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!
Update on Multiples
When looking at median multiples we’re now below where we were pre-covid. The overall median multiple is 4% below pre-covid highs, 17% above where we were on Jan 1, 2020, and 5% below the previous peak in August 2019.
However, high growth software multiples are still elevated. Looking at high growth software median only - we are still 52% above pre-covid highs, 80% above where we were on Jan 1, 2020, and 20% above the previous peak in September 2019.
Highlight of the Week - Morgan Stanley Q4 CIO Survey
I always like reading the quarterly CIO survey from Morgan Stanley. Here are some highlights / charts:
“Expectations for software spending growth in 2022 remain ahead of historical levels, refuting the notion of a pull forward in demand in CY21. CIOs expect software spending growth of +5.0% in 2022, compared to the 10-year average of +4.5% before 2020 and +4.9% average in CY17-CY19. The second flash for CIO's 2022 spending growth expectations remains in-line with 2021 spending growth at +5.0%, suggesting CIOs foresee current spending levels sustaining.”
"Survey data suggests 25% of application workloads are running in the public cloud today, up from 23%... in 2Q21. The multi-year trend in the migration of applications to the cloud remains intact, with CIOs expecting 44% of workloads to reside in public cloud by 2024"
We’re in the early innings of the cloud!
Security software remains the most defensible category:
"As workloads continue to shift from on-premise to the cloud, Microsoft and Amazon remain the largest beneficiaries , both in 2021, as well as over the next three years"
"Snowflake screens as the vendor with the highest weighted average growth expectations in 2022 at +7.1%...30% of CIOs surveyed expecting spend to increase in 2022, vs. 0% of CIOs expecting spend to decrease." Microsoft has the highest up-to-down ratio of 70%
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 Median: 10.5x
Top 5 Median: 33.1x
3 Month Trailing Average: 13.9x
1 Year Trailing Average: 15.5x
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: 22.0x
Mid Growth Median: 9.5x
Low Growth Median: 4.5x
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
Median NTM growth rate: 25%
Median LTM growth rate: 34%
Median Gross Margin: 74%
Median Operating Margin (19%)
Median FCF Margin: 3%
Median Net Retention: 119%
Median CAC Payback: 25 months
Median S&M % Revenue: 45%
Median R&D % Revenue: 26%
Median G&A % Revenue: 19%
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.