Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Rule of X Meritech and Bessemer both recently did an analysis that looked at the Rule of 40 and asked the question “what if growth / profitability shouldn’t be treated equally in the Rule of 40?” The Rule of 40 looks at the sum of a companies growth rate and FCF margin (or some other profitability metric like EBIT margin) and posits that the sum should be >40%. For both of those metrics I look at NTM (next twelve months) vs LTM (last twelve months). This could be a 30% growth rate and 10% FCF margin. Or 10% growth rate and 30% FCF margin. But should these businesses trade at the same multiple? Is the relative importance of growth and FCF margin the same? One other way to look at this, at Bessemer describes, is to put a multiplier in front of rev growth. So the formula for Rule of 40 becomes (growth multiplier) * rev growth + FCF margin. If the multiplier is <1, that’s another way of saying growth is less important. And if it’s >1 that’s another way of saying it’s more important. And when I say more / less important what I really mean is how important is it to the public market valuations at that point in time. And as we know, this fluxuates
Your work is great Jamie, first of all thank you for it!
Why are the NTM multiples based off of the Enterprise Value?
Have you considered publishing multiples based off of Market Cap?
While EV can give us more detail like debt and etc, in the end it doesn't accurately tell you - the investor - what multiple you're actually paying.
Since we're focused on Confluent, we notice that the 10.3x NTM multiple is based off of their 9.79B EV, as only then do we get to the $950M NTM revenue that the company has projected.
Your work is great Jamie, first of all thank you for it!
Why are the NTM multiples based off of the Enterprise Value?
Have you considered publishing multiples based off of Market Cap?
While EV can give us more detail like debt and etc, in the end it doesn't accurately tell you - the investor - what multiple you're actually paying.
Since we're focused on Confluent, we notice that the 10.3x NTM multiple is based off of their 9.79B EV, as only then do we get to the $950M NTM revenue that the company has projected.
Big fan of your work. Would love if you can include other profitable SaaS companies like Vimeo on this list. It appears you have their competitors.
Your PANW FY24 guide vs pre-earnings consensus change in the chart is incorrect.