Clouded Judgement 8.4.23 - Cloud Giants Q2 Update

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

Cloud Giants Update

“What we're seeing in the quarter is that those cost optimizations, while still going on, are moderating and many maybe behind us in some of our large customers. And now we're seeing more progression into new workloads, new business. So those balanced out in Q2. We're not going to give segment guidance for Q3. But what I would add is that we saw Q2 trends continue into July.”

“And I would say that while I expect there will continue to be cost optimization, I think that the balance of cost optimizations to actually new workloads and new migrations as we saw a shift in that in Q2, I expect that we'll continue to see that shift over time.”

These are two quotes about AWS on the Amazon earnings call. We’ve all been waiting for cloud optimizations to ease up, and this is our clearest signal that we’re getting there. Tailwind of new workloads starting to overtake headwinds of optimizations. AWS grew 16% in Q1, but called out growth in April (first month of Q2) was 11%. Then Q2 came in at 12% (must have seen improvements throughout the quarter). And most importantly, they’ve seen these positive trends continue.

Here’s a broad update on AWS, Azure and GCP:

AWS (Amazon): $89B run rate growing 12% YoY (last Q grew 16%)

Azure (Microsoft): ~$63B run rate (estimate) growing 27% YoY (last Q grew 31%)

Google Cloud (includes GSuite): $32B run rate growing 28% YoY (last Q grew 28%, neither are cc)

AWS

Growth came in at 12%, but it’s looking like that may be the bottom (lowest YoY growth rate quarter). You can see more detail about their net new ARR added each quarter below

Azure

Growth came in at 27%, and guided to 25-26% growth for Q3. That means we very well could see 27% be the bottom for them as well (assuming they beat their guidance). You can see more detail about their net new ARR added each quarter below

Google Cloud

Growth came in at 28%, which was the same as Q1. You can see more detail about their net new ARR added each quarter below

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: 6.4x

• Top 5 Median: 16.1x

• 10Y: 4.2%

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: 9.4x

• Mid Growth Median: 8.7x

• Low Growth Median: 3.7x

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

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: 15%

• Median LTM growth rate: 24%

• Median Gross Margin: 75%

• Median Operating Margin (19%)

• Median FCF Margin: 6%

• Median Net Retention: 115%

• Median CAC Payback: 48 months

• Median S&M % Revenue: 46%

• Median R&D % Revenue: 27%

• Median G&A % Revenue: 18%

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.

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.