Revisiting the “Is Software Expensive” QuestionThe current median revenue multiple for the software universe is 6.4x, which is ~17% below the long term average multiple of 7.8x. However, when looking at growth adjusted multiples, the current median is 0.48x, which is ~75% above the long term average of 0.28x (you can see this chart later on in this post in the EV / NTM Rev / NTM Growth section)! So on a pure revenue multiple basis the software universe looks “slightly cheap.” But on a growth adjusted basis, the software universe looks “super expensive.” Below is a chart that shows how growth has really trailed off the last few years. During the period where the long term average multiple was 7.8x, the median projected growth rate was 27%. The median projected growth rate today is 14%The pi

Going in to this earnings season I expected a big driver of stock price performance to be how 2024 full year estimates change pre / post earnings. Since the macro feels more “stabilized” it felt fair to assume “are numbers going up or down” to be the question most correlated with stock price performance. After a few software companies have reported we can start to look at the data behind “are numbers going up.” Surprisingly, despite the huge moves in stock price ($Palantir Technologies Inc.(PLTR)$ / $Confluent, Inc.(CFLT)$ both +30% and $Cloudflare, Inc.(NET)$ was +20% after hours yesterday), we really haven’t seen forward estimates change that much. The chart bel

If AI delivers on its promise, it may spell the end of the SaaS business model as we know it. Historically, cloud software businesses charged a recurring fee based on the number of users of their software - the SaaS model. Then infrastructure / dev tools software companies took a different approach - more of a consumption based pricing model (I’m generalizing, not all infra is consumption based). Look at $Twilio(TWLO)$ - they charge per message sent. Or $Snowflake(SNOW)$ who charges based on compute used or data stored. At the end of the day, software vendors want to align value delivered with price charged. Back to the Twilio example - let’s say I, as a solo developer, built an application on Twilio that

Q2 earnings season is now behind us. I’ll provide a more comprehensive recap later, but for now, let’s look at how the future outlook has changed after Q2 earnings. One metric I like to examine is how much companies adjust their full-year guidance. Generally, software companies follow a beat-and-raise model in their forecasts. The “raise” part reflects how much the future outlook (i.e., the guidance) changes. When we compare full-year guidance for 2024 from the Q2 call versus the Q1 call (~3 months ago), you’ll see in the graph below that, for the most part, full-year guidance didn’t change significantly. The median full-year “raise” was only 0.3%.Looking at Q2, the median “beat” (i.e., how much a company’s Q2 results exceeded consensus) was around 1.5%. So, while the median quarterly beat

AWS report is out - seeing some reversal in incremental share gained from $Microsoft(MSFT)$ Azure to $Amazon.com(AMZN)$ AWS (45% incremental share -> 41% / 30% -> 34%)Recall - AWS is the bell weather for many SW stocks. Many of them will be up tomorrow!ImageAWS crossed a $100B run rate growing 17%! Truly MASSIVE scale Quarterly YoY growth trends in below chart.ImageOne of my favorite charts - this shows the Quarterly absolute change in revenue YoY. So the most recent data point shows Q1 '24 AWS rev - Q1 '23 AWS revImageBelow is an estimate of net new ARR added over the last few quarters.ImageSome additional charts on the aggregate hyperscaler data from Q1. First, the chart below shows the YoY growth

A couple quotes from the $Amazon.com(AMZN)$ $Microsoft(MSFT)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ earnings call really stood out to me this week.Amazon on AWS: “…customers are continuing to shift their focus towards driving innovation and bringing new workloads to the cloud. Similar to what we shared last quarter, we continue to see the diminishing impact of cost optimizations. And as these optimization slow down, we're seeing more companies turning their attention to newer initiatives and reaccelerating existing migrations.”Microsoft on Azure: “And I think last quarter, we said one, we are going to continue to have thes

Hi Tigers,I‘m partner at Altimeter investing and partnering predominantly with software businesses.Any of the Below SaaS companies in your focus?Weekly updated, as of May 26thYTD 2023, as of May 31stIf you'd like to stay in tune with valuations / trends driving public SaaS businesses please follow along! I'll also provide detailed earnings summaries. More to come-Looking forward to all of your feedback on Clouded Judgement.Earnings Special: 1. $Snowflake(SNOW)$ quarter: $624M rev (+48% YoY) vs $609M consensus (2% beat) $623M next Q product rev guidance vs $646M consensus (4% miss) Dropped full year product rev guide to 34% YoY 151% NRR 39 months GM adj. CAC payback 66% GM - 45% FCF Margin2. $Cloudflare, Inc.(N

First Look at April QuartersHeading in to last week, software earnings have not been good. Last week, we got a first look at companies reporting with April quarter ends (so we got the benefit of one incremental month of data). Perhaps we’d see a positive shift? Unfortunately, that didn’t happen… The Workday earnings call summarized it well:“But within the quarter, we experienced increased deal scrutiny as compared to prior quarters, and we are seeing customers committing to lower headcount levels on renewals compared to what we had expected. We expect these dynamics to persist in the near term, which is reflected in our revised FY '25 subscription revenue guidance. While we can't control the macro, we are focusing on what's in our control, and that is innovation, scaling our go-to-market a

Azure Report - Cloud Infra Looks Good! $Microsoft(MSFT)$ kicked off earnings season with a bang! For software, all eyes were on Azure - which grew 31% YoY (ahead of expectations closer to 29%). What was arguably more impressive (and a better indicator of what’s to come for the rest of infrastructure software than overall Azure growth) was the Azure growth excluding AI Services (since Azure uniquely benefits from this). I have to “swag” this a bit. Azure doesn’t disclose exact Azure quarterly revenue (they disclose growth rate in absolute terms and in constant currency), but there are good estimations. So the overall Azure quarterly revenue figure is already not entirely spot on. For Azure AI Services, they just disclose the pts of growth they saw

Q3 ‘23 Earnings Summary PreviewThe vast majority of all software companies have now reported Q3. I’ll put together a deeper dive review in a week or two, but wanted to provide a preview here. Overall, I’d describe the tagline of Q3 software performance as “stabilizing trends with some green-shoots starting to show up.” Here’s a summary of the quarter in 5 charts:Quarterly Growth rates: Still decelerating, but not as quicklyNet Retention: Down from historical averages, but starting to level off. Net retention is more of a lagging indicator, so I expect this downward trend to continueFCF Margins: Down slightly, but still at that >10% rangeCAC Payback Period: Still elevated. Companies have reduced headcount, but new bookings aren’t getting any easierQuarterly net new ARR growth: Some green

Two weeks ago I wrote about the growing number of private zombies. A common question I got after that post was “what should I do if I’m in that position?” A couple thoughts below. Most importantly - don’t wait. Don’t hope for things to improve. Hope is not a strategy. It’s a lottery ticket. I think there are 3 concrete things to do:Figure out if you’re a short / long term zombie: Turnarounds are hard, but they do happen. There may be some idiosyncratic reasons your market turned on you, but you expect it to turn back. There’s no need to panic at the “bottom,” but it’s also very important to be realistic about your chances of revivalGet closer with your existing investors. At some point you will want to raise more money. It may be a down round. Or you’re hoping to raise a flat round to “val

In Q1 '24 top decile Cloud companies:- Beat estimates by >4%- Guided next quarter >1% above consensus- Grew >33% YoY- Gross Margin >84%- FCF Margin >42%- Net Retention >120%- CAC Payback <21 months $Snowflake(SNOW)$ $ServiceNow(NOW)$ $UiPath(PATH)$ $Zoom(ZM)$ $Datadog(DDOG)$ $8x8(EGHT)$ $Box(BOX)$ $MongoDB Inc.(MDB)$ $Samsara, Inc.(IOT)$ $Shopify(SHOP)$

10Y RisingThe 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 upAs 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 w

So far we’ve got a number of full year 2024 guides. Overall, companies are not guiding above current consensus (median guide is 0.2% below consensus). Is this just companies guiding conservatively, to set up the year for beat and raises? There’s been a lot of dislocation in the world, and after going through the last few years I can see how companies would want to “set a low bar” for the full year. $MongoDB Inc.(MDB)$ is fresh on my mind as they reported earnings yesterday. Despite beating Q4 by 6%, they guided the full year 5% below consensus estimates (and also guided Q1 ‘24 2% below consensus estimates). The full year guide assumes 14% growth for this upcoming year after they grew 31% in 2023. They did call out a couple one time benefits they sa

Cloud Giants Report Q3 ‘23Not a great signal for software this week from the Cloud Giants (AWS, Azure and Google Cloud)…After Q2 (3 months ago), the tone from the Cloud Giants around optimizations was largely: optimizations have started to ease, and net new workloads have picked up. You can see some quotes from Azure / AWS in my Q2 recap, and pasted below.I believe one of the bigger reasons software has held up despite the run up in the 10Y to 5% is the expectation for re-acceleration (ie numbers / forecasts going up). Either that or folks are expecting the 10Y to fall back to 3.5% which feels unlikely. Software multiples today are at the same place they were (on average) in May when the 10Y was at 3.4%. After the cloud giants reported this week, the timing of the presumed re-acceleration