Every week I’ll provide updates on the latest trends in cloud software companies. Follow along to stay up to date! Rates Keep Going Up Rates continue to push higher, as the aftershock of the Fed’s “Higher for Longer!!” messaging reverberates through the markets. Yesterday the 10Y hit 4.7% which was up from it’s high of ~4.5% last week. These are pretty big moves in rates in just one week. What’s been most surprising to me is how resilient software valuations have been in the face of pretty massive moves in rates. The current median multiple is ~5.7x. As a reminder - the average software multiple from 2010-2020 was ~7.8x, and the average 10Y over that same period was ~2.3%. Given those two data points alone I’d expect the median multiple today to be closer to 4x! Clearly the bond markets are saying something different than software valuations. The disconnect in rates and multiples is even more stark when we look at growth adjusted multiples (taking revenue multiples and dividing them by forward growth rates). The current median growth adjusted multiple is 0.39x which is actually greater than the long term average pre-covid of 0.28x (so 40% higher!). Pretty crazy to think about - growth adjusted multiples are near pre-covid all time highs (excluding 2020-2021 period) even though rates are as high as they’ve been since 2007 (and double what they were on average from 2010-2020).
What really should matter is a "5-year forward CAGR adjusted revenue multiple". Growth adjusted multiple looks high today as growth has decellerated, but the market is pricing in that 5 year growth for these businesses will still be very strong.