Clouded Judgement 5.7.21

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!

This Week’s Sell-Off

This week cloud software companies sold off between 10-20%. I’ve written in previous posts how the sell off towards the end of March and into April was (inversely) correlated with the 10-Year treasury yield. So far in 2021 we’ve seen the 10-Year shoot up from 1% to 1.5%, while cloud multiples fell. However, over the last couple weeks the 10-Year has held steady in the 1.5-1.6% range. In fact, it actually fell slightly over the last week as cloud multiples also fell significantly. From what I can gather, the sell off this week has more to do with what people expect rates will do over the next 6 months, vs what they are presently doing. 2 days ago treasury secretary Janet Yellen stated that rates may have to rise to keep the economy from overheating. This has sparked fear that rates will rise in the near term, and growth assets are coming down as a result.

However - even with the sell off from this week, valuations are still well above historical levels. It’s hard to know when we’ll hit the “bottom,” but it’s clear that if the bottom ends up being pre-covid multiples we still have a ways to go. More here:

Jamin Ball @jaminball

Some perspective on the current sell off in cloud software: - Current median NTM revenue multiple is ~14x. This is 27% higher than pre-covid highs - For high growth software, current median NTM revenue multiple is ~22x. This is 41% higher than pre-covid highs

Quarterly Reports Summary

Lots of companies reported this week.

Top 10 EV / NTM Revenue Multiples

*UiPath will be included when consensus estimates become available

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 Stats:

• Overall Median: 14.4x

• Top 5 Median: 35.3x

• 3 Month Trailing Average: 16.3x

• 1 Year Trailing Average: 14.9x

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: 22.5x

• Mid Growth Median: 13.5x

• Low Growth Median: 7.7x

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 (12%)

• Median FCF Margin: 8%

• Median Net Retention: 117%

• Median CAC Payback: 21 months

• Median S&M % Revenue: 43%

• Median R&D % Revenue: 25%

• Median G&A % Revenue: 15%

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.