Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Revisiting the “Is Software Expensive” Question The current median revenue multiple for the software universe is 6.4x, which is ~17% below the long term average multiple of 7.8x. However, when looking at growth adjusted multiples, the current median is 0.48x, which is ~75% above the long term average of 0.28x (you can see this chart later on in this post in the EV / NTM Rev / NTM Growth section
I have always felt that free cash flow based valuation multiples are faulty and undependable for deciding whether to buy or trim a stock. In 2023 many growth companies have been playing the FCF shell game trying to make their stock look more attractive while shareholder dilution and anemic growth continues behind the curtain. Revenue multiples are better suited for mature growth companies, not for hyper growth businesses. So that leaves us with forward growth based multiples being the better barometer showing that most of this universe is overvalued today.
Why is "shareholder dilution" a bad sympton? Fast growing companies raising capital in the public markets is precisely a sign of growth and trust from the market, even though some shareholders dont keep up the pace and suffer dilution.
Great point on growth adjusted valuation. It will be curious to see how the top quartile of growth companies valuation compare to past decade when rates were lower
I have always felt that free cash flow based valuation multiples are faulty and undependable for deciding whether to buy or trim a stock. In 2023 many growth companies have been playing the FCF shell game trying to make their stock look more attractive while shareholder dilution and anemic growth continues behind the curtain. Revenue multiples are better suited for mature growth companies, not for hyper growth businesses. So that leaves us with forward growth based multiples being the better barometer showing that most of this universe is overvalued today.
Why is "shareholder dilution" a bad sympton? Fast growing companies raising capital in the public markets is precisely a sign of growth and trust from the market, even though some shareholders dont keep up the pace and suffer dilution.
When do you update the SaaS companies chosen in your charts? I'd like to see a few that are FCF positive now be included.
Great point on growth adjusted valuation. It will be curious to see how the top quartile of growth companies valuation compare to past decade when rates were lower