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Clouded Judgement 4.23.21
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!
10 Year Yield vs Cloud Multiples
Over the last week we’ve seen the correlation of the 10 Year Yield and cloud multiples start to break apart. It’s hard to say if this is a longer term return to normal (historically these two aren’t tightly correlated over long periods of time, but do have shorter periods of time of high correlation). The 10 Year rose rapidly from 1% - 1.7%, and in that window we saw a tight correlation with cloud multiples. Now that the 10 Year has started to stabilize in the 1.5-1.6% range (this is where it was in January ‘20, pre Covid), the correlation has broken down
Quarterly Reports Summary
Qualtrics kicked off Q1 Cloud earnings season with a bang! It feels like we just wrapped up Q4 earnings season, but we’re back at it again. Qualtrics had an extremely positive quarter. Revenue growth accelerated meaningfully (36% YoY growth vs 24% YoY growth last quarter). It’s only one data point, but I expect this to be a sign of some strong results across the board in Q1. Digital Transformation projects that were kicked off 1-2 quarters ago are now resulting in buying behavior.
UiPath is easily the highest profile cloud business to go public since Snowflake. It priced at $57 / share (above the initial range of $43-$50, and revised range of $52-$54), opened at $66 / share, and closed yesterday at $76 / share. I won’t have consensus forward estimates for a few weeks, but my best guess would peg the NTM revenue multiple at ~40x. This would be the 3rd highest cloud software multiple, behind Snowflake and Bill.com.
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 Median: 15.3x
Top 5 Median: 38.7x
3 Month Trailing Average: 16.6x
1 Year Trailing Average: 14.6x
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: 26.3x
Mid Growth Median: 15.1x
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
Median NTM growth rate: 24%
Median LTM growth rate: 29%
Median Gross Margin: 74%
Median Operating Margin (11%)
Median FCF Margin: 9%
Median Net Retention: 117%
Median CAC Payback: 19 months
Median S&M % Revenue: 42%
Median R&D % Revenue: 25%
Median G&A % Revenue: 18%
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.