Clouded Judgement 11.7.25 - Market Cycles

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

Market Cycles

If I had to simplify software market cycles, I’d say they come in two phases: the expansionary phase and the consolidation phase.

In the expansionary phase, buyers scoop up software almost indiscriminately. There’s little concern for cost or efficiency, what matters is speed. It’s about accelerating product development, capturing market share, or outspending competitors to stay ahead, all under the assumption that growth will take care of everything else. During this phase, public markets shift their focus entirely to growth over profits. Take a look at the multiples chart I post later on breaking out multiples by high, medium, and low-growth companies. You can see the high-growth bucket has seen multiple expansion this year, while the mid-growth bucket has seen steady contraction.

In the consolidation phase, companies start to heavily scrutinize their existing vendor relationships, looking for places to cut costs or consolidate spend into bundled platforms.

2020–2021 and today, I’d argue, were / are expansionary phases. A few years back, the driver was low interest rates. Today, the driver is AI. No one wants to fall behind, and everyone is willing to spend to figure it out. Whether that means experimenting with new tools, building internal capabilities, or buying growth stories tied to AI. The fear of missing the next platform shift has become its own form of FOMO, and it’s fueling a new wave of aggressive software spending.

2022–2023 was the period of consolidation. During that time, how often did we hear phrases like “Microsoft is bundling their way to dominance” or “sales cycles are elongating”? The emphasis shifted, and everyone started worrying about cost. Gone were the days of growth at all costs. Point solutions were axed or absorbed into broader platforms, and in markets with five or more competing vendors, a single player, often the best-of-breed solution, emerged as the long-term winner while the rest tailed off.

I don’t know when we’ll exit the current expansionary phase, but it will happen eventually, and we’ll enter another period of consolidation. The longer this expansion lasts, the longer (and more painful) the next consolidation will be. And this is separate from the debate over whether we’re “in a bubble.” Bubbles relate more to valuations. What I’m describing is the underlying psychology of buying and procuring software. They’re related, of course, but there’s nuance in the difference.

I call this out because now, more than ever, when I’m evaluating earlier-stage businesses, I often find five to ten competitors per category, sometimes more. It’s easier than ever to start a company. And because we’re in such an expansionary period (and so many of the markets being created today are greenfield), it’s common to see all ten companies in a space showing strong growth. They all seem to be working. A lot of it echoes what we saw in 2020–2021: buyers shortening sales cycles, rushing to get new tools in place, and buying quickly. Once the consolidation phase hits, that behavior flips. Suddenly, there’s intense scrutiny on every vendor relationship.

We’ll inevitably hit that point again, and we’ll look back on this moment and wonder, “How did I ever think five companies in the same market could all become successful public companies?” Of course the market, and market share, will consolidate around one or two. It always does.”

This is one of the hardest parts of venture today. The rising tide is so strong that everyone with an AI tailwind looks like they’re working. But separating who’s working now (in the easy expansionary phase) from who will survive and thrive later (in the difficult consolidation phase) is more important than ever. Venture investing is about long time horizons, and success ultimately comes from backing the companies that can endure through consolidation—not just accelerate during expansion.

For founders, it’s worth being intellectually honest. Are you growing because you’ve truly built the best solution in the market? Or because you’re riding a rising tide? Getting that answer wrong, and not addressing it early, can make the next consolidation phase a very painful one. This phase can also be quite frustrating for companies with leading offerings in their category. Subpar competitors raise venture capital with ease, flooding the market with marketing confusion. However, this too shall pass. The focus should always be on building the best product experience for your customers. Eventually the market will coalesce around the best product (of course this undermines the importance of great execution along the way!)

Quarterly Reports Summary

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: 4.9x

• Top 5 Median: 24.6x

• 10Y: 4.1%

Bucketed by Growth. In the buckets below I consider high growth >22% projected NTM growth, mid growth 15%-22% and low growth <15%. I had to adjusted the cut off for “high growth.” If 22% feels a bit arbitrary, it’s because it is…I just picked a cutoff where there were ~10 companies that fit into the high growth bucket so the sample size was more statistically significant

• High Growth Median: 16.3x

• Mid Growth Median: 6.3x

• Low Growth Median: 3.8x

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 its 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: 11%

• Median LTM growth rate: 14%

• Median Gross Margin: 76%

• Median Operating Margin (2%)

• Median FCF Margin: 19%

• Median Net Retention: 108%

• Median CAC Payback: 30 months

• Median S&M % Revenue: 37%

• Median R&D % Revenue: 24%

• Median G&A % Revenue: 15%

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 pay back its 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. Altimeter and its clients trade in public securities and have made and/or may make investments in or investment decisions relating to the companies referenced herein. The views expressed herein are those of the author and not of Altimeter or its clients, which reserve the right to make investment decisions or engage in trading activity that would be (or could be construed as) consistent and/or inconsistent with the views expressed herein.

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.