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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
Is the SaaS multiple decline nearing an end?
January 12, 2022
  • We wrote last quarter that high SaaS multiples "could create an air pocket in a correction." The question is whether the recent sharp declines have brought multiples to a foundation that can support future gains. We believe we are getting close, although the market can always overshoot to the downside like we believe it did on the upside. In any case, we think the answer must be determined on a stock-by-stock basis.
  • SaaS stocks declined 8.3% in the December quarter, significantly underperforming the S&P 500's 10.6% gain (and the proxy WCLD is down another 7.5% since Dec. 31). The average enterprise value multiple of estimated 2021 revenue decreased to 18.5 from 20.6 last quarter, which was its peak. At this point, we will start focusing on 2022 and even 2023 multiples. Due to the expected rapid growth of our SaaS universe, the average multiple for 2022 dropped to 13.9 from 15.7 at the end of September.
  • Some SaaS groups managed to post average stock price gains in the quarter, with the Internet of Things (IoT) group leading and edging out the cybersecurity group with an average 5.5% gain versus cybersecurity's 5.3%. The cybersecurity group had led the past two quarters. The future-of-work group led the declines with an average 13.5% decline followed by the e-commerce group with an average 13.1% decline. Stock performance was highly variable. New Relic (NEWR) gained 53.2%, and 12 companies lost over 30%, including Everbridge (EVBG), which was down 55.4%.
  • Since our last report, we added Certara (CERT), Couchbase (BASE), EngageSmart (ESMT), EverCommerce (EVCM), ForgeRock (FORG), Freshworks (FRSH), Instructure (INST), Paymentus (PAY) and PowerSchool (PWSC) to the universe and removed CornerstoneOnDemand and Medallia because each was acquired. This brings our SaaS universe to 82 names. In the December quarter, Mimecast (MIME) agreed to be acquired by private equity firm Permira for $80 per share, or 9.7 times annualized revenue based on December quarter revenue. Small-cap Zix, which was not in our universe but is heavily SaaS, was acquired by OpenText (OTEX) for $8.50 per share, or 3.4 times estimated 2021 revenue.


SaaS stocks building a base

Growth impact on valuation

SaaS stocks with big Q4 declines fall in two main categories

Q4 SaaS M&A: Notable transactions include acquisitions of VNDLY and Zix

Q4 SaaS private placements: Notable transactions include Orca Security, TripActions

SaaS stocks building a base

The SaaS stock correction that took hold in November appears to have been triggered by Federal Reserve hawkishness, which is expected to lead to higher interest rates and less quantitative easing in 2022 and beyond. According to this reasoning, future earnings are worth less as interest rates increase (and most SaaS earnings are years away), meaning valuations decline. However, this assumes investors were using Treasury rates as the discount rate for their discounted cash flow (DCF) calculations rather than the risk adjusted rate of around 10% for public companies that we typically use. Further, most public SaaS companies are well capitalized and have such solid growth prospects that they should be relatively insulated from any economic impacts their customers experience from modest Fed tightening. We believe the more salient factor is that Federal Reserve policies created an environment where there were few attractive alternatives to investing in stocks, leading to momentum investing and a simple case of overvaluation.

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