Clouded Judgement 3.19.21

Every week I’ll provide updates on the latest trends in SaaS valuations, earnings announcements, and highlight any significant news. Follow along to stay up to date!

Quarterly Reports Summary

Rising Rates

The 10-Year rate is not always correlated to cloud software multiples, but since cloud multiples hit their high in early February, the correlation has been extremely high. Multiples peaked on Feb 8th and have since steadily declined nearly 30%. During the period from Feb 8th to today, the correlation between the 10-Year rate and median cloud multiples has been -93%! The negative correlation means as one variable goes up (rates) the other goes down (multiple). 0.93 (on an absolute basis) is incredibly high. Is this just a coincidence? We’re cloud multiples stretched, due for an inevitable pullback, and that pullback just so happened to occur when the 10 Year rates were rising (which they have been since August '20)? My personal take is rates hit a certain threshold, continued to rise, and this drove massive sector rotation. There are moments in the market when events and money flows overwhelm all else. I’ll dig into this further in a later post. But for now, here’s the date - looking at the recent highly correlated period, as well as zooming out over the last 6 years. Over a 6 year horizon, the correlation is not nearly as strong (-0.5)

Period of high correlation (-0.93)

Last ~6 years (much lower correlation of -0.5)

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. In the buckets below I consider high growth >30% projected NTM growth, mid growth 15%-30% and low growth <15%

Overall Stats:

• Overall Median: 14.0x

• Top 5 Median: 35.8x

• 3 Month Trailing Average: 17.5x

• 1 Year Trailing Average: 14.0x

Bucketed by Growth:

• High Growth Median: 28.4x

• Mid Growth Median: 13.8x

• Low Growth Median: 6.4x

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: 24%

• Median LTM growth rate: 29%

• Median Gross Margin: 74%

• Median Operating Margin (13%)

• Median FCF Margin: 9%

• Median Net Retention: 116%

• Median CAC Payback: 21 months

• Median S&M % Revenue: 44%

• Median R&D % Revenue: 25%

• Median G&A % Revenue: 18%

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.