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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 stocks rebound; how much upside remains?
July 8, 2021
  • SaaS stocks recovered in June, finishing the quarter with a 13.2% average gain and beating the S&P 500's 8.2% gain. With the exception of the cybersecurity stocks, our SaaS universe lagged earlier in the quarter as value names generally outperformed growth and momentum stocks in April and May. When longer-term interest rates declined after Federal Reserve comments on June 16, our SaaS universe seemed to get a boost. The quarter-end average enterprise value multiple of 2021 estimated revenue increased to 17.9 from 16.0 last quarter and beat the previous high of 17.6 in December 2020. However, given the rapid revenue growth of our SaaS universe, the multiple of 2022 estimated revenue drops to 14.1.
  • The cybersecurity sector led the way with an average 25.7% gain in the June quarter as highly publicized ransomware reports became more frequent. Stock performance within the broad SaaS group varied widely, with Asana (ASAN) gaining 117.0% and Agora (API) losing 16.5%. Proofpoint (PFPT) gained 38.1% after it agreed to be acquired by Thoma Bravo, and Cloudera (CLDR) gained 30.3% after it agreed to be acquired by KKR and Clayton, Dubilier and Rice. Both companies had underperformed as public companies, in our view, before agreeing to be acquired. Vertical SaaS names declined 0.1% on average for the quarter.
  • We've added recent initial public offerings (IPOs) Coursera (COUR) and Qualtrics International (XM) to the Future of Work sector and removed Talend (TLND), which agreed to be acquired by Thoma Bravo in March. This brings our SaaS universe to 68 names. Late in the June quarter, many new SaaS companies came public, which we will consider adding to our universe next quarter.


With multiples at a new high, how much upside remains?

Growth impact on valuation

Q2 SaaS performance beats S&P 500

Q2 M&A: Notable transactions include Proofpoint, Cloudera take-outs,'s Divvy purchase

Q2 private placements: Notable transactions include Florence, Degreed, KeepTruckin

With multiples at a new high, how much upside remains?

With our SaaS universe average enterprise value multiple of estimated 2021 revenue hitting 17.9, above the previous high of 17.6 in December, the question is how much upside remains. Before getting too nervous, we note the average multiple of estimated 2022 revenue is much lower at 14.1 due to the group's rapid growth. Further, forward revenue expectations tend to be conservative, implying the real 2022 multiple will be still lower, maybe around 13. So the upside potential of our SaaS group tends to increase over time, and returning to the multiple of forward revenue seen last December implies roughly 30% upside from today.

Of course, December valuations may not be a good benchmark. In our January 2019 SaaS report we presented a SaaS model discounted cash flow analysis based on three variables: initial growth rate, the rate of growth rate decay, and terminal cash flow as a percent of revenue. Using this framework, it is difficult to justify an enterprise value multiple of current revenue over 10 unless the growth decay rate is 3% or less. (We assumed initial growth rates of 30% and 20%; very high initial growth rates could justify higher multiples.) This may also explain why many acquisitions in the SaaS space are done at multiples of 10 times revenue or less, with the notable exception of Slack (WORK), which is selling for an enterprise value that was approximately 26 times expected forward revenue at the time the deal was announced.

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