Clouded Judgement 3.8.24 - 2024 Guides

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

2024 Guides - Are they Conservative?

So far we’ve got a number of full year 2024 guides. Overall, companies are not guiding above current consensus (median guide is 0.2% below consensus). Is this just companies guiding conservatively, to set up the year for beat and raises? There’s been a lot of dislocation in the world, and after going through the last few years I can see how companies would want to “set a low bar” for the full year.

MongoDB is fresh on my mind as they reported earnings yesterday. Despite beating Q4 by 6%, they guided the full year 5% below consensus estimates (and also guided Q1 ‘24 2% below consensus estimates). The full year guide assumes 14% growth for this upcoming year after they grew 31% in 2023. They did call out a couple one time benefits they saw in 2023 they don’t expect to see in 2024. One of these was recognizing $40m of revenue in 2023 from unused Atlas commits, and a new sales comp structure that moves incentives away from up front commits (and thus means they expect to recognize $0m in revenue this upcoming year from up front commits). The other one time benefit from 2023 was ~$40m of multi-year license deals. They don’t expect that aggregate $80m of revenue from 2023 to repeat in 2024. IF you factor in that $80m (ie give them credit this year which was probably baked into consensus), then the full year guide was only 1% below consensus.

So was the guide for this year conservative? A year ago, they guided 2023 growth to 16%. They ended up actually growing 31% (and if you remove that $80m of revenue mentioned above then growth was still 25%, but I’m not quite sure it makes sense to remove that $80m since the comp structure at the time was more based around committed credits). Either way - they ended up performing much better than their initial guide, and ultimately their stock was one of the top preforming software companies in 2023 (they were up >100%). I’m not trying to imply the reason the stock performed so well was they gave themselves a low bar and then exceeded it. There was way more to it than that. However, in this environment (ie if macro / rates don’t turn into a headwind), normally the simple analysis on what drives a stock is “are the estimates going up or down?”

Q4 earnings (what we’re going through right now) are generally the first period where we get full year guides. Companies that come in meaningfully lower than consensus (Snowflake, Palo Alto Networks, Mongo, etc) generally see big hits to their stock as forward estimates are coming down. Companies that come in ahead of consensus (Confluent, Samsara, etc) generally see their stocks go up as numbers are going up. Again, it’s a lot more nuanced than that and the setup leading into the quarterly report matters a lot.

I do think that identifying stocks who are most likely to outperform their full year guide coming out of Q4 earnings will provide the best setup for 2024 performance.

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: 6.2x

• Top 5 Median: 19.4x

• 10Y: 4.1%

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: 13.0x

• Mid Growth Median: 9.5x

• 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: 17%

• Median Gross Margin: 75%

• Median Operating Margin (12%)

• Median FCF Margin: 10%

• Median Net Retention: 110%

• Median CAC Payback: 37 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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