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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 supports First Analysis' investments in AmpliFund, Drive My Way, Freeosk, 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
Christopher Stiegal
Vice President
First Analysis Quarterly Insights
Software as a Service
Expanding SaaS multiples became less correlated to growth outlook in Q4
January 16, 2024
  • Our SaaS universe gained 16.0% on average in the December quarter. The cybersecurity and data visibility groups continued to be the leading gainers.
  • The SaaS average enterprise value multiple of 2023 estimated revenue increased to 7.8 from 6.6 last quarter. For 2024, the average multiple was 6.7, up from 5.6 last quarter despite an expected slowdown in growth to 13.3% from 15.8% last quarter.
  • Correlations between revenue multiples and revenue growth expectations, which were already low by our historical measures, declined from the September quarter, suggesting the valuation gains in the quarter were based on factors other than fundamental growth prospects; we believe momentum was a big factor.

TABLE OF CONTENTS

Overview of our analysis

“Go-to-market” software group newly broken out in our universe

Signs of life in M&A

Revenue multiples expand; correlation to growth declines

Cybersecurity and data visibility again lead stock price gains in quarter

SaaS M&A: Notable transactions include Parchment and Talon Cyber Security

SaaS private placements: Notable transactions include AssemblyAI, Cart.com

Overview of our analysis

Our SaaS universe gained 16.0% on average in the December quarter, beating the S&P 500’s 11.2% gain. Twenty-five stocks (25.5% of our universe) gained over 30% in the quarter. Only four SaaS stocks (4.1%) declined by more than 20% in the quarter. The SaaS average enterprise value multiple of 2023 estimated revenue increased to 7.8 from 6.6 last quarter. For 2024, the average multiple was 6.7, up from 5.6 last quarter despite an expected slowdown in growth to 13.3% (from 15.8% last quarter). Correlations between multiples and revenue growth expectations, which were already low by our historical measures, declined from the September quarter.

The five largest-capitalization names we discussed last quarter – Salesforce (CRM), ServiceNow (NOW), Shopify (SHOP), Snowflake (SNOW) and Workday (WDAY) – all participated in the strength, gaining 26.4% to 42.8%. The cybersecurity and data visibility groups continued to be the leading gainers, with the cybersecurity group up 33.3% on average and the data visibility group up 27.4% on average; neither saw any acquisition activity in the quarter. The future of work group was the worst performer, gaining only 2.2% on average in the quarter.

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