Clouded Judgement 4.11.25 - The Bond Market

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

The Bond Market - Crisis Averted?

April has been WILD. 8 trading days in, and we’ve had moves of +12%, -6%, -5% and -4% in the Nasdaq. The couple days that were in the +/- 1% range felt “normal” even though historically those would be somewhat large moves for an overall index.

Tuesday night the bond market was going crazy (ie rates were rising). Tuesday evening the 10Y rose from 4.3% to 4.5%. Speculation was foreign governments (Japan / China / etc) were selling their US treasuries. I’ll try not to go into too much detail, but if large holders of any security (bonds / treasuries / etc) start selling it pushes the price down (imagine what would happen if someone put a $20b market sell order Salesforce, the stock would tank). And bonds have two components - their price, and their yield. They have an inverse relationship. When price falls, the yield rises. Imagine a $100 bond, with a 10 year maturity that paid out 5%. I could buy that bond at issuance for $100, collect $5 / year, and get paid back my $100 (the principal) in year 10. Now let’s say rates are at 6%. Why would I ever pay $100 for that bond to get $5 / year, when I could buy the same bond but receive $6 / year? The answer is I wouldn’t, it makes no sense… UNLESS instead of paying $100, I paid something like $95. Then (in this world of only two bonds), I could either pay $95 up front, receive $5 / year, and $100 in year 10. Or pay $100, receive $6 / year, and receive $100 in year 10. I’m making up the numbers here, but you can see why there’s an inverse relationship between bond prices and bond yields. In practice, the bond market is highly efficient, and the total payout of any bond should be the same. In summary - if large external governments were to dump US bonds, the price of those bonds would fall, and the yield would rise.

This all REALLY mattered because this week the Department of the Treasury conducted large auctions of treasury notes ($39b of 10 year notes and $22b of 30 year notes). But put yourself in the shoes of a potential buyer in this auction. Seeing the bond market action Wednesday night - you had to be nervous. What if foreign governments kept dumping US Treasuries (pushing the yields higher)? Why would you want to buy a security with an interest rate, knowing there’s a good chance rates were going to push higher if more selling happened? The answer is you probably wouldn’t. You’d want to wait and see. OR you’d want to be compensated for that risk (and ask for a higher rate). If these bond auctions failed (because people had uncertainty about buying and there wasn’t enough demand), it would have pushed rates through the roof (you’d have to pay a higher yield to incentivize buying). Rates going through the roof would have been really bad… Luckily they avoided this situation. Trump came out with a 90 day extension of most tariffs (maybe this somehow calmed down foreign governments? I’m not totally sure), the equity markets skyrocketed Wednesday and the bond market slightly calmed down.

All eyes were on tariffs this week, but the real action was in the bond markets… Even more so than equities, bonds are often an indicator of tumult or calm in the financial markets. So watch that space.

I have no idea how companies will think about issuing forward guidance when we get to Q1 earnings given all the uncertainty… It seems like the only option would be to issue very conservative guidance, which would lower earnings estimates, pushing growth rates / multiples lower…I hope we have a more optimistic outcome!

March Inflation

Lost in the shuffle of the week, was a much lower inflation print than expected. Core CPI dropped below 3%. No one seemed to care (if tariffs hit, people expect this figure to go up).

March Inflation (CPI) Update:

• Headline CPI: 2.4% YoY (2.5% consensus) and -0.1% MoM (+0.1% consensus)

  • In February Headline CPI was 2.8% YoY and 0.2% MoM

• Core CPI: 2.8% YoY (3.0% consensus) and 0.1% MoM (0.3% consensus)

  • In February Core CPI was 3.1% YoY and 0.2% MoM

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: 4.7x

• Top 5 Median: 17.2x

• 10Y: 4.4%

Bucketed by Growth. In the buckets below I consider high growth >27% projected NTM growth (I had to update this, as there’s only 1 company projected to grow >30% after this quarter’s earnings), mid growth 15%-27% and low growth <15%

• High Growth Median: 13.2x

• Mid Growth Median: 8.7x

• Low Growth Median: 3.9x

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: 11%

• Median LTM growth rate: 15%

• Median Gross Margin: 76%

• Median Operating Margin (6%)

• Median FCF Margin: 16%

• Median Net Retention: 108%

• Median CAC Payback: 43 months

• Median S&M % Revenue: 39%

• Median R&D % Revenue: 24%

• 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

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