Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Stocks are set to fall further today, likely forcing shares in SaaS and cloud companies down yet again. After two wild trading weeks, the high-flying tech category is off over 9% from recent highs before the bell this morning, putting it close to correction territory. (A correction is usually defined as a decline in value of 10% or more from recent highs.)
With today’s expected declines, SaaS companies are likely set to close out Friday close to or in a formal correction. Even more notably the Bessemer cloud index, which tracks public SaaS companies, is worth less today — even before fresh declines — than it was last July. That implies that SaaS companies have not only given up recent gains; they’ve shed all their progress since last Summer.
But the news isn’t all bad. Even while all the companies that Bessemer’s handy have grown since their mid-2019 size, Bessemer is reporting a slightly expansion in the value of SaaS revenue since that date. It’s an odd moment that we’d best unpack.
Let’s observe the market data, and examine a few public SaaS companies to see its impacts. For startups, today’s dive is an attempt to understand how public market investors are valuing recurring revenue. It’s something worth grokking if you have a pricing event coming up this year. Let’s go!
Back in July, 2019, SaaS stocks were testing new record highs. Those results would be bested by 2020’s mid-year rally, but at the time the price movements were news. SaaS companies took hits later in 2019, before recovering in early 2020.
Setting out to explore SaaS valuations this morning, I expected to see a decline in the revenue multiples of cloud companies. If the firms had grown revenue since last summer (correct), and their shares were worth about the same (correct), surely their revenue multiples would have compressed? Perhaps not, though I can’t tell you why.
Here’s something I wrote back in July of 2019:
Wrapping quickly as we’re nearly onto the holiday freeze here in America, according to venture collective Bessemer (the folks behind the above-cited index) the SaaS and cloud companies present in its index are trading at an 11x enterprise value/revenue multiple. Think of this metric as similar to a revenue multiple, but instead of dividing market cap by revenue, we’re using enterprise value, a different but related metric.
What is that figure today, according to the venture firm? 12.7x, according to the firm. So what we can say is that despite things looking rough for SaaS — no price movement despite nearly three quarters of growth — things are not as bad as expected. Being in correction territory is annoying, surely, but at least SaaS multiples are holding up well in the face of a changing market.
Twilio is a good example of what we’re talking about. The firm was worth over $140 per share back in July of 2019. Today it’s worth about $103. That, despite growing its revenue from a Q2 2019 result of $275.0 million to $306.6 million in Q4 2019 to an expected Q1 2020 result of $336.85 million. More revenues, lower valuation, is what the stock market is telling us today as we observe modern software companies.
But it’s not all bad news. There are still a number of companies that are trading far above historical SaaS valuation norms. Let’s check in.
SaaS’s highest-flyers are still richly valued, correction be damned. Zoom’s epic run has continued after its strong earnings report, while other famous SaaS shops have found a new trading multiple range to share.
According to YCharts data, Zoom’s trailing price/sales multiple (a way to track public-company revenue multiples) is back over the 50 mark. At the same time, Slack, CrowdStrike, and Atlassian have all found a home at about half that level, trading for 23x to 25x revenue. Here’s the chart:
So while SaaS as a cohort isn’t having a very good time lately, there are still outlier valuations available for stand-out companies in the category. All you have to do is post mind-bending growth and better-than-average profitability.