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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
SaaS valuations continue to decline despite solid growth outlook
July 14, 2022
  • Our SaaS universe stocks dropped 30.3% on average in the June quarter, and the average SaaS company enterprise value multiple of estimated 2022 revenue at the end of the quarter dropped to 7.5 from 11.2 at the end of the March quarter and to 5.9 for 2023 estimated revenue from 8.7 last quarter. At the same time, the estimated revenue growth outlook for our universe is essentially unchanged.
  • The correlations between growth rates and revenue multiples continued to deteriorate during the quarter. We believe this reflects SaaS stocks being indiscriminately dumped by investors.
  • Higher correlations prevailed for years prior to 2022. To the extent the correlations revert toward the norm, we think it will be mainly due to investors becoming more discriminating in valuations rather than a re-rating of the entire sector. As such, we believe individual stock selection could be more highly rewarded than buying a SaaS index.

TABLE OF CONTENTS

Average valuation down 30%+; average growth outlook little changed

Have SaaS stocks hit the bottom?

Growth impact on valuation

30% average Q2 price decline for our SaaS universe

Q2 SaaS M&A: Notable transactions include acquisitions of Deliverr, Hitch Works, Zendesk

Q2 SaaS private placements: Notable transactions include Nikola Labs and Velocity Global

Average valuation down 30%+; average growth outlook little changed

Our SaaS universe stocks dropped 30.3% on average in the June quarter, worse than the 16.4% drop for the S&P 500, which joined the SaaS sector in bear market territory with total declines over 20% from their peaks. The average SaaS company enterprise value multiple of estimated 2022 revenue at the end of the quarter dropped to 7.5 from 11.2 at the end of the March quarter and to 5.9 for 2023 estimated revenue from 8.7 last quarter. At the same time, the estimated revenue growth outlook for our universe is essentially unchanged. While analyst estimates for growth may come down a bit from current levels due to a slowing economy or the higher dollar, we believe our SaaS universe has much less dependence on the economy and lower foreign exposure than the broad market.

Zendesk's (ZEN) June 24 decision to sell itself to private equity firms Permira and Hellman & Friedman for $10.2 billion ($77.50 per share, 6 times estimated 2022 revenue), after foregoing a higher offer in February and taking itself off the market on June 9 was emblematic of the valuation declines and set a new valuation benchmark for private equity purchases of companies committed to selling. The stock had traded as high as $153 per share in the 2021 first half. While we believe there could be strong demand from private equity buyers for additional SaaS company purchases at current prices, deals may be hard to consummate since recent open-market buyers may not want to sell at a loss.

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