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About the Author:
James Macdonald
Managing Director
Jim Macdonald has over two decades of experience at First Analysis, working with entrepreneurs as an investor and as an advisor on growth transactions to help build leading software-as-a-service (SaaS) businesses. With his widely read “SaaS Quarterly Insights” report, he is a thought leader in the area, and his work has been cited for excellence in the Wall Street Journal’s “Best on the Street” survey, in Forbes and in other publications. He serves on the boards of Amplifund, Fleetworthy, Freeosk, Mediant, Netchex, SynergySuite, Transformative Pharmaceutical Solutions, ViralGains and Yello. Prior to joining First Analysis in 1997, he was a general manager at Nalco Chemical Co., where he played a key role in expanding Nalco’s service offering to include operating and leasing equipment at customer sites. This led to formation of a joint venture with U.S. Filter Co. Earlier, he was with a subsidiary of Ecolab Inc. He earned an MBA from Harvard University and a bachelor’s degree in civil engineering from Cornell University, where he also earned the university’s highest award in that discipline.
First Analysis SaaS Team
Matthew Nicklin
Managing Director
James Macdonald
Managing Director
Corey Greendale
Managing Director
Howard Smith
Managing Director
Richard Conklin
Managing Director
Andrew Walsh
Managing Director
David Gearhart
Senior Vice President
Terry Kiwala
Vice President
First Analysis Quarterly Insights
Software as a Service
Mixed quarter for SaaS universe
October 12, 2021
  • SaaS stocks gave up most of their September-quarter gains in the month of September but still finished up 3.9% on average, beating the S&P 500, which was essentially flat. The cybersecurity and Future of Work sector stocks were up as much as 20% during the quarter but closed up 11.3% for cybersecurity and 8.0% for Future of Work. The average enterprise value multiple of 2021 estimated revenue increased to 20.6 as of Sept. 30, a new high for 2021 and up from 17.9 at the end of June. However, given the high revenue growth rates in our SaaS universe, the multiple of 2022 estimated revenue was 15.7 (compared to 14.1 at the end of June).
  • The cybersecurity sector's 11.3% gain was the highest among all the groups. Individual stock performance across the universe varied widely, with Asana (ASAN) gaining 67.4% (also leading last quarter with a 117.0% gain) and Appian (APPN), Wix.com (WIX), Fastly (FSLY) and Agora (API) all declining by more than 30%. Despite agreeing to be acquired, Medallia (MDLA) and Cornerstone OnDemand (CSOD) gained little: 0.4% for Medallia and 11.0% for Cornerstone. The two weakest groups were Internet of Things, down 16.7% on average, and e-commerce, down 7.2% on average despite SPS Commerce's (SPSC) 61.6% gain.
  • In the quarter, we added newly public Confluent (CFLT), Doximity (DOCS), Marqeta (MQ), Monday.com (MNDY), SentinelOne (S), Sprinklr (CXM), Unity Software (U) and WalkMe (WKME) and removed Cloudera and Proofpoint due to their acquisition. This brings our SaaS universe to 74 names. In the September quarter, Cornerstone OnDemand agreed to be acquired by private equity firm Clearlake for $57.50 per share. Medallia is being acquired by Thoma Bravo for $34.00 per share. Five 9 (FIVN) agreed to be acquired by Zoom Media, but the deal was terminated at the end of the quarter after a shareholder vote and threatened Justice Department review.

TABLE OF CONTENTS

Multiples continue to expand; could create an air pocket in a correction

Growth impact on valuation

Rising rates pressure the DCFs underpinning SaaS valuations

Q3 M&A: Notable transactions include Intuit's Mailchimp purchase, Cornerstone OnDemand take-out

Q3 private placements: Notable transactions include Articulate Global, Netskope, Fabric

Multiples continue to expand; could create an air pocket in a correction

The average enterprise value multiple of estimated 2021 revenue for our SaaS universe was 20.6 at the end of September, above the previous quarter-end high of 17.9 for the June quarter. Formerly, only the fastest-growing stocks garnered such multiples. Now 15 of our 74 companies trade at 2021 multiples over 30, led by Snowflake (SNOW) at 75.1, SentinelOne at 66.2, and Cloudflare (NET) at 54.8. Given their fast revenue growth, their multiples of 2022 estimated revenue drop to “only” 45.7, 38.8, and 40.9. And, for the full SaaS universe the average 2022 multiple drops to 15.7. As time passes, revenue multiples can shrink significantly for these fast-growing companies.

While we don’t often talk about trading factors like momentum and technical analysis, we are concerned that Federal Reserve policy has helped fuel momentum-driven rallies for several of our SaaS names and that once the music stops, there may be no technical support until a drop of 20%, 30% or even 50% or more has occurred.

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