Clouded Judgement 2.16.24 - Jan Green Shoots + CPI

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

January Green Shoots

A couple key software players have given us commentary in their Q4 earnings report (quarter ending December) that January (the first month of Q1) saw some green-shoots. Could this be the sign of a slow rebound?

From Datadog: “For the first time in 6 quarters, our sequential ARR adds in Q4 were higher than in the year-ago quarter. As we look at early data for Q1, January usage growth was solid. The rebound we're seeing from the slower end of December is better than what we experienced last January.”

From Confluent: “In fact, we saw good traction in total customer count in January.” “So where are we now? Yes, I wouldn't say it's all back to where 2021 was, but there are some green shoots, right? There's -- we've definitely seen more activity in the digital native space, right? I think some of the optimization has been accomplished.”

From AWS (paraphrased): They said they expect the reaccleration they saw in Q4 to continue into 2024

2024 Estimate Updates

One important metric I’m tracking this quarter is the change in 2024 estimates pre / post earnings. Said another way, are the Q4 ‘23 earnings release a catalyst for future full year estimates to go up or down? So far, the median change is 0.2%. Said another way, estimates are not going up after the set of earnings so far

January Inflation (CPI) Update

CPI:

• January CPI YoY was +3.1% vs expectations of +2.9% (and +3.4% in December)

• January CPI MoM +0.3% vs expectations of +0.2% (and +0.2% in December)

• January Core CPI (ex Food/Energy) YoY +3.9% vs expectations of +3.7% (and +3.9% in December)

• January Core CPI (ex Food/Energy) MoM +0.4% vs expectations of +0.3% (and +0.3% in December)

So what were the rate implications? Given inflation came in higher than expected, the markets expectations for future rate cuts came down (ie not expecting as many cuts, or for the cuts to happen as frequently. The chart below shows the markets projections for where the Fed Funds rate will be at certain moments in time. The effective fed funds rate today is 5.33%. The dark blue line show’s today’s projections. As you can see, just two months ago, the market predicted that that Fed Funds rate would be 3.6% in Jan ‘25 (implied ~7 rate cuts of 25bps each). Today, the projection is 4.32% (implied ~4 rate cuts). So in just two short months, the expectations for what the Fed does with the Fed Funds rate has changed pretty dramatically. In that time period the 10Y has jumped from 3.9% to 4.2%

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: 6.4x

• Top 5 Median: 20.6x

• 10Y: 4.2%

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: 16.6x

• Mid Growth Median: 10.3x

• Low Growth Median: 4.6x

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: 13%

• Median LTM growth rate: 19%

• Median Gross Margin: 75%

• Median Operating Margin (13%)

• Median FCF Margin: 9%

• Median Net Retention: 112%

• Median CAC Payback: 39 months

• Median S&M % Revenue: 42%

• Median R&D % Revenue: 25%

• Median G&A % Revenue: 16%

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. 

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