SaaS companies guide low for 2023; how much is conservatism?

Our SaaS companies that provided guidance for both 2022 and 2023 expect 2023 revenue to grow on average only about two-thirds as fast as they expected revenue to grow in 2022. The magnitude of guidance declines was relatively consistent across companies and groups, leading us to think conservatism is a significant factor.

The average SaaS stock in our universe appreciated 19.4% in the March quarter, well ahead of the S&P 500’s 7.0% gain.

In our analysis of revenue multiples versus estimated revenue growth rates for 2023 and 2024, the correlations remained low at 0.49 for 2023 (down from 0.52 last quarter) and 0.38 for 2024.

Our SaaS companies that provided guidance for both 2022 and 2023 expect 2023 revenue to grow on average only about two-thirds as fast as they expected 2022 revenue to grow: 17.4% in 2023 versus 27.5% in 2022. (This excludes companies in the vertical SaaS and other groups.) The lower growth outlook comes despite the fact these companies grew revenue by 29.3% on average, 1.8 points above guidance in a slowing economy during 2022. We believe the lower guidance is due to generally slowing growth as companies mature (2022’s 29.3% average revenue growth rate was down from 38.6% in 2021), economic weakness, and conservatism due to uncertainty over the economy; the fact that the magnitude of guidance declines was relatively consistent across companies and sectors suggests to us conservatism was a significant factor.

The average SaaS stock in our universe appreciated 19.4% in the March quarter, well ahead of the S&P 500’s 7.0% gain. Once again, performance varied widely among the 97 companies in the universe, with 28 stocks gaining over 30% and 22 stocks declining. Surprisingly, none of the top three gainers were acquisition targets. The average enterprise value multiple of 2023 estimated revenue increased to 6.2 from 5.2 last quarter. For estimated 2024 revenue, the average multiple was 5.2.