Clouded Judgement 9.23.22

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

Fed Update

This week the fed hiked the fed funds rate by 75bps, bringing the target range now to 3.0% - 3.25%. What was more interesting than the 75bps hike (this was fairly consensus), was the commentary Powell made in his prepared remarks. One message was clear - he doubled down on the hawkish tone he spoke with in Jackson Hole. The Fed is clearly looking to fight inflation at all costs, regardless of the impacts their policy creates on the broader economy. The Dot Plot, which represents where each FOMC member believes rates will head, now implies a 75bps hike in November and 50bps in December, getting us to a year end rate of 4.25% - 4.5%. Current projections are 4.4%.

On top of this - market consensus is now for another 25bps hike in 2023 as well, getting us to a 2023 year end rate of 4.6%. In the prior quarter’s Dot Plot the implied 2023 year end rate was 3.8%. As you can see, the biggest change coming out of Wednesday is that the market expects rates to stay higher for longer. The result was a drop in equities, and a rise in the 10Y (to 3.7%). Right now the S&P is only about 2% higher than where it was in June lows. The Nasdaq is about 5% above where it was in June lows

Q2 Earnings Summary

This week I posted a Q2 earnings summary that can be found here

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 Stats:

• Overall Median: 5.4x

• Top 5 Median: 15.3x

• 10Y: 3.7%

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: 10.8x

• Mid Growth Median: 5.4x

• Low Growth Median: 3.0x

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: 21%

• Median LTM growth rate: 30%

• Median Gross Margin: 74%

• Median Operating Margin (25%)

• Median FCF Margin: 0%

• Median Net Retention: 120%

• Median CAC Payback: 33 months

• Median S&M % Revenue: 48%

• Median R&D % Revenue: 28%

• Median G&A % Revenue: 20%

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.