Clouded Judgement 1.5.24

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

10Y Rising

The start of the year has not been kind to software stocks! In the basket I track and discuss in Clouded Judgement (~80 companies), no one is up on the year. In just the last couple weeks from mid December to today we’ve seen the 10Y move from 3.8% to 4%. We really didn’t get much of a move in software valuations through the end of December, but got hit with a bigger drop this week.

The chart below shows how the consensus around the fed funds rate has shifted over the last few months. As you can see, from December 14th to today we’ve seen projections for where rates end 2024 move up

As we head into this year, I think there’s really one thing to keep an eye on - do 2024 estimates trend up or trend down throughout the year? In the short term, when rates are more stable (and I think we’ll see this with inflation being less of a question mark this year), if numbers go up stocks tend to go up. And if they go down, stocks tend to go down! Over longer periods of time relative valuation and starting points play a bigger role. But in short term, it tends to be more about which direction are estimates heading. I’ll report more on this as we start getting to the start of Q4 earnings season in the end of January. If we look at where estimates were in the fall (for year end 2024), vs where they were at the end of 2023, the median company saw their 2024 consensus estimate fall 1%. So a drop, but not a meaningful one. As we get to Q4 earning season and companies guide for the first time for the full year 2024, I think we may get bigger moves as clarity emerges around “are 2024 estimates too high or too low?” Should be an exciting earning season!

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: 6.0x

• Top 5 Median: 15.3x

• 10Y: 4.0%

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: 14.2x

• Mid Growth Median: 8.2x

• Low Growth Median: 4.0x

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: 14%

• Median LTM growth rate: 20%

• Median Gross Margin: 75%

• Median Operating Margin (13%)

• Median FCF Margin: 8%

• Median Net Retention: 112%

• Median CAC Payback: 39 months

• Median S&M % Revenue: 43%

• Median R&D % Revenue: 26%

• 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

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. 

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.