10Y Rising
The start of the year has not been kind to software stocks! In the basket I track and discuss in Clouded Judgement (~80 companies), no one is up on the year. In just the last couple weeks from mid December to today we’ve seen the 10Y move from 3.8% to 4%. We really didn’t get much of a move in software valuations through the end of December, but got hit with a bigger drop this week.
The chart below shows how the consensus around the fed funds rate has shifted over the last few months. As you can see, from December 14th to today we’ve seen projections for where rates end 2024 move up
As we head into this year, I think there’s really one thing to keep an eye on - do 2024 estimates trend up or trend down throughout the year? In the short term, when rates are more stable (and I think we’ll see this with inflation being less of a question mark this year), if numbers go up stocks tend to go up. And if they go down, stocks tend to go down!
Over longer periods of time relative valuation and starting points play a bigger role. But in short term, it tends to be more about which direction are estimates heading. I’ll report more on this as we start getting to the start of Q4 earnings season in the end of January. If we look at where estimates were in the fall (for year end 2024), vs where they were at the end of 2023, the median company saw their 2024 consensus estimate fall 1%.
So a drop, but not a meaningful one. As we get to Q4 earning season and companies guide for the first time for the full year 2024, I think we may get bigger moves as clarity emerges around “are 2024 estimates too high or too low?” Should be an exciting earning season!
Top 10 EV / NTM Revenue Multiples
$Snowflake(SNOW)$ $Cloudflare, Inc.(NET)$ $CrowdStrike Holdings, Inc.(CRWD)$ $Datadog(DDOG)$ $Samsara, Inc.(IOT)$ $Zscaler Inc.(ZS)$ $MongoDB Inc.(MDB)$ $Atlassian Corporation PLC(TEAM)$ $ServiceNow(NOW)$ $Palantir Technologies Inc.(PLTR)$
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: 6.0x
Top 5 Median: 15.3x
10Y: 4.0%
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: 14.2x
Mid Growth Median: 8.2x
Low Growth Median: 4.0x
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
The line chart shows the median of all companies with a FCF multiple >0x and <100x. I created this subset to show companies where FCF is a relevant valuation metric.
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: 14%
Median LTM growth rate: 20%
Median Gross Margin: 75%
Median Operating Margin (13%)
Median FCF Margin: 8%
Median Net Retention: 112%
Median CAC Payback: 39 months
Median S&M % Revenue: 43%
Median R&D % Revenue: 26%
Median G&A % Revenue: 17%
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.
https://cloudedjudgement.substack.com/p/clouded-judgement-1524
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