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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, Fleetworthy Solutions, 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
SaaS valuations contract as growth outlook weakens
October 24, 2023
  • The average stock in our SaaS universe declined 5.1% in the September quarter, modestly underperforming the S&P 500's 3.7% decline. The average enterprise value multiple of estimated 2023 revenue for our SaaS universe decreased to 6.6 from 7.0 last quarter. For 2024 estimated revenue, the average multiple was 5.6, down from 5.9 last quarter.
  • The average expected 2023 revenue growth rate was 16.1% as of Sept. 29, down from 16.2% on June 30, and the average expected 2024 revenue growth rate was 15.8%, down from 17.1%.
  • The data visibility group had an average gain of 4.7% and included both announced acquisitions in our universe. However, the cybersecurity group led with a 9.0% average gain.
  • With correlations between revenue multiples and growth rates remaining low, there are many wide outliers.

TABLE OF CONTENTS

Overview of our analysis

Five largest SaaS stocks corrected after earlier outsized gains

Revenue multiples compress

Cybersecurity group posts largest average price gain in weak SaaS quarter

SaaS M&A: Notable transactions include Splunk and Tabula Rasa

SaaS private placements: Notable transactions include Apollo.io and Hyperproof

Overview of our analysis

The average stock in our SaaS universe declined 5.1% in the September quarter, modestly underperforming the S&P 500's 3.7% decline. Six SaaS stocks (6.4% of our universe and including two that announced they would be acquired) gained over 20%. Seventeen (18.1% of our universe) declined over 20%. The average enterprise value multiple of estimated 2023 revenue for our SaaS universe decreased to 6.6 from 7.0 last quarter. For 2024 estimated revenue, the average multiple was 5.6, down from 5.9 last quarter.

Larger-capitalization SaaS names (those with more than $50 billion enterprise value) had benefited in the 2023 first half and early in the September quarter, but most ended the quarter flat to down. The data visibility group had an average gain of 4.7% and included both of the announced acquisitions in our universe. However, the cybersecurity group led with a 9.0% average gain. The healthcare group was the largest decliner for the second quarter in a row with a 17.0% decline.

Our SaaS universe remains at 94 names with none added or removed in the quarter. There was one significant SaaS initial public offering in the quarter, Klaviyo (KVYO), which we will consider adding next quarter. New Relic (NR) and Splunk (SPLK) announced in the September quarter they would be acquired, so we will likely remove them next quarter.

As we expected, acquisitions are being done at enterprise values in the range of 5-10 times forward revenue for higher quality assets. New Relic agreed to be acquired by private equity firms Francisco Partners and TPG for $6.5 billion, or $87 per share, which represents an enterprise value 6.3 times estimated fiscal 2024 (March) revenue. Near the end of the quarter, Splunk agreed to be acquired by Cisco (CSCO) for approximately $29 billion, or $157 per share, representing an enterprise value 7.1 times estimated fiscal 2024 (April) revenue.

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