Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Event Path for 2022 A few weeks ago I talked about an event path for 2022. Specifically, in order for valuation multiples to return to long term averages (we’re currently ~20% below long term averages), we’d need clarity on interest rates and a potential recession.
Jamin...this para contained some great points. So important for growth investors to understand this.
"What this means in oversimplified terms is that if inflation is higher than expected, rates may need to be higher than expected, which then lowers long duration asset values (like growth software stocks). Long duration means the present value relies heavily upon future cash flows. Even for growth software with FCF today (Datadog, Crowdstrike, Snowflake, etc), we still see a heavier weighting of FCFs in the future driving present value today. All this means is that as interest rates go up, the rate at which we discount these future cash flows goes up (ie they’re worth less today). A lower growth, higher FCF business today doesn’t have as high of a weighting of future FCF to present valuation (ie present value is future cash flow streams that are fairly constant each year vs increasing dramatically each year), so interest rate moves impact their valuation less."
Agree with most of what you said but based on the DOCU commentary and from some others, public market drawdown impacting attrition which can be debilitating for both sales and product. Clearly the best cultures will win and especially those with solid FCF. Interesting times to pick winners.