Clouded Judgement 2.18.22
Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date!
More Volatility
This week was another rocky one for cloud software stocks. A few notable drops occurred after companies reported Q4: Amplitude fell 59%, Fastly fell 34%, WalkMe fell 26%, Wix fell 20%, and Shopify fell 17%. These are all huge 1 day moves for software stocks! The market is clearly still churning and digesting implications from higher inflation prints, and uncertainty around Russia.
Related to the high inflation print - it’s clear this year we’ll see a number of rate hikes, and this has started the process of multiple normalization in cloud software land. However, not all companies are seeing their multiples “normalize” at the same rate. This has resulted in some companies going into earnings with still elevated multiples. So far, the results have been extremely harsh for those who don’t deliver anything short of perfection. At the same time, we saw Datadog, ServiceNow, Bill.com and Atlassian all jump >10% the day after their earnings. Not all software is created equal! The next month of earnings season should be very interesting. I’m calling it the great reckoning of multiple normalization. We should end up at a point where only the truly special companies have outlier multiples.
Update on Multiples
The overall median multiple is 15% below pre-covid highs, 3% above where we were on Jan 1, 2020, and 16% below where we were at the previous peak in August 2019. It is important to note that pre covid we were still at relatively high multiples, historically speaking. So while we are below where we were pre covid, that doesn’t mean we’ve overshot the bottom.
High growth software multiples are still elevated. Looking at high growth software median only - we are still 27% above pre-covid highs, 50% above where we were on Jan 1, 2020, and right at the previous peak in September 2019.
Quarterly Reports Summary
Top 10 EV / NTM Revenue Multiples
Top 10 Weekly Share Price Movement
Update on Multiples
SaaS businesses are valued on a multiple of their revenue - in most cases the projected revenue for the next 12 months. Multiples shown below are calculated by taking the Enterprise Value (market cap + debt - cash) / NTM revenue.
Overall Stats:
Overall Median: 9.2x
Top 5 Median: 33.5x
3 Month Trailing Average: 11.7x
1 Year Trailing Average: 14.7x
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: 17.9x
Mid Growth Median: 8.5x
Low Growth Median: 3.5x
Scatter Plot of EV / NTM Rev Multiple vs NTM Rev Growth
How correlated is growth to valuation multiple?
Growth Adjusted EV / NTM Rev
The below chart shows the EV / NTM revenue multiple divided by NTM consensus growth expectations. The goal of this graph is to show how relatively cheap / expensive each stock is relative to their growth expectations
Operating Metrics
Median NTM growth rate: 26%
Median LTM growth rate: 34%
Median Gross Margin: 75%
Median Operating Margin (19%)
Median FCF Margin: 3%
Median Net Retention: 119%
Median CAC Payback: 24 months
Median S&M % Revenue: 45%
Median R&D % Revenue: 26%
Median G&A % Revenue: 19%
Comps Output
Rule of 40 shows LTM growth rate + LTM FCF Margin. 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.
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.