Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Software Setup Currently, interest rates seem to be the primary driver of software valuations. We just wrapped up Q2 earnings season, and are a couple months away from getting incremental data on individual company performances (Q3 earnings season). So until we get that data, we’ll see short term moves more tied to rates. Let’s put aside the short term, and think about what the drivers will be of software valuations over the next couple quarters into the first half of 2024. I think it boils down to two main questions that are tied together:
I have more of a question than a comment. Would the small cap (say less than $5B) SaaS companies have the bandwidth with respect to the expertise and the budget to implement AI in their products?
@Jamin in your Top 10 EV / NTM Revenue Multiples table, is the delta between negative Operating Margin and positive FCF Margin mostly SBC?
"Normally we’d expect growth to decay from one year to the next at about 80%. So if a company grew 50% this year, we’d expect them to grow 40% the following year."
Interesting 🤔 I like it!
One thing I notice about the "24 growth minus 23 growth" chart is that some (not all) companies arranged to the leftmost side are among the most distressed businesses with perhaps the least credible management. So there could be a degree of (self-)deception at work there in setting those optimistic estimates. I'm sure you have dealt with many portfolio companies that are consistency budgeting for a speculative re-acceleration that never happens.