Clouded Judgement 1.16.25 - December Inflation
Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!
December Inflation
There are periods of time where the market is more driven by macro factors, and other times where it’s less influenced by macro factors. Presently, it feels like the market is waiting on pins and needles for incremental macro data points. I wrote last week about how rates have been rising, despite the Fed being in a cutting cycle. One big reason for that is the combination of strong economic data with potentially rising inflation data. If the economy stays strong, but inflation starts rising, it suggests the market can withstand / absorb higher rates, and there wouldn’t be a need to cut. The “inflation is reigniting!” fears seem to be real. But are they justified? This week on Wednesday morning, we got the December inflation figures, and it came in lighter then expected. The Nasdaq (from Tuesday close to Wednesday close) was up 2.3%. That’s a pretty big move for the Nasdaq! Inflation came in light, and stocks went up!
December Inflation (CPI) Update:
Headline CPI: 2.9% YoY (2.9% consensus) and 0.4% MoM (0.4% consensus)
In November Headline CPI was 2.7% YoY and 0.3% MoM
Core CPI: 3.2% YoY (3.3% consensus) and 0.2% MoM (0.3% consensus)
In November Core CPI was 3.3% YoY and 0.3% MoM
December PPI Update:
Headline PPI: 3.3% YoY (3.5% consensus) and 0.2% MoM (0.4% consensus)
Core PPI: 2.4% YoY (2.7% consensus) and 0.0% MoM (0.3% consensus)
So what’s happened with rate expectations? The below charts show the markets expectations for rates at different points in time. The blue line is pre-election. The orange line is early this week (pre December inflation release), and the grey line is yesterdays expectation (post December inflation release). This chart shows really well how rate expectations have fluctuated in the last ~2.5 months. The gap between the blue and orange line is quite large, and shows the impact of the Trump election (proposed tariffs, stronger economy, etc) as well as incremental economic data that has been released. And the gap between the orange and grey line shows the impact of the December inflation release on rate expectations.
Overall, it’s hard not to feel optimistic about the year ahead! Or maybe I’m just an inherently optimistic person. The economy is strong, I’d question the “inflation is going to re-accelerate!” narrative, we’re at the onset of a foundational technology transformation, etc. There’s no better time to be focused on technology!
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: 6.3x
Top 5 Median: 19.1x
10Y: 4.6%
\Bucketed by Growth. In the buckets below I consider high growth >27% projected NTM growth (I had to update this, as there’s only 1 company projected to grow >30% after this quarter’s earnings), mid growth 15%-27% and low growth <15%
High Growth Median: 9.2x
Mid Growth Median: 11.5x
Low Growth Median: 4.5x
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: 12%
Median LTM growth rate: 14%
Median Gross Margin: 76%
Median Operating Margin (7%)
Median FCF Margin: 16%
Median Net Retention: 109%
Median CAC Payback: 37 months
Median S&M % Revenue: 40%
Median R&D % Revenue: 24%
Median G&A % Revenue: 17%
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
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