PVC SaaS Index™ | Q1 2021 Update

Practical Summary:

  • The 112 companies in our PVC SaaS Index™ trade at just over 12x EV / LTM revenues, just above the recent historical range of 8-10x, although down from its high last quarter of 13x.
  • A basket of 53 recent SaaS IPOs (companies that went public post 2016) are now trading just above 19x revenues, also just below their all-time high.
  • These recent SaaS IPOs together are worth nearly $800B. Collectively, they reported an incredible fourth quarter, with a median YoY revenue growth rate of 34% and cap-weighted revenue growth of 91% YoY.
  • This kind of performance is astonishing, unheard of for any sector of publicly traded stocks, at any time in history. It’s all the more impressive because it happened while a sharp recession was playing out in the US and Europe.

This post is an update in a quarterly series of posts that tracks the PVC SaaS Index™, a basket of publicly traded US-listed SaaS companies.

Software as a Service (“SaaS”) has been around longer than the cool new “cloud.” It shares some aspects of cloud computing, but the focus tends to be clearer: SaaS is simply the delivery of software applications over the Internet from a server hosted by the SaaS provider somewhere far away.

The first big SaaS IPO was Salesforce (NASDAQ: CRM) in 2004. Now we have 112 pure-play SaaS/cloud companies in our proprietary PVC SaaS Index™ and they:

  • now trade on either the NASDAQ or the NYSE
  • derive the large majority of recognized revenues from long-term contractual commitments (12 months or greater) and recognize those revenues periodically over the life of these contracts

Q1 2021 Valuation Update

The chart below shows the historical EV / LTM (“enterprise value” to “last twelve months” of revenue) going back to 2015. At the end of Q1, the median value in the index popped to over 12x. SaaS companies that went public more recently (i.e., after January 1, 2016) are also at an all-time high of 21x.

Figure 1. Historical SaaS Valuations
Source: CapitalIQ; PVC analysis
“Current” represents the trading value as of May 12, 2021.

Are We in a Bubble?

Given this multiple expansion over the past year and the fact that this index is now trading at an all-time record, one might wonder if we’re in a bubble and whether these multiples are sustainable.

The broader US equity market is certainly trading in some rarified air, even if it’s not an outright financial bubble. By one excellent measure, the Shiller PE Ratio, the US-dominated S&P 500 is now trading at a ratio of “market capitalization / 10-year earnings” of 37.4.

The Shiller PE Ratio is a measure that compares the aggregate market capitalization of S&P 500 component stocks to their last 10 years of inflation-adjusted earnings. It’s also known as the “Cyclically-Adjusted Earnings Ratio.”

Figure 2. Shiller PE Ratio, Historical Value
Source: https://www.multpl.com/shiller-pe. Data courtesy of Nobel Prize winner Robert Shiller, from his best-selling book Irrational Exuberance (2016; Princeton University Press).

By my reckoning, the Shiller Ratio has averaged between 26-28 over the past three economic expansions, suggesting that we are about 20-30% overvalued relative to historic norms. I personally think that there are several very good reasons why the US equity market should command an historical premium at this stage of the economic recovery.

For one, interest rates are now much lower and the level of the overall money supply relative to the market is much higher than they were at the outset of any of these three recent expansions.

Table 1. Shiller PE Ratio in Prior Expansions
Source: https://www.multpl.com/shiller-pe. Treasury bond rates courtesy of US Federal Reserve, from https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart.

For another, the relative attractiveness of US equities (versus bonds or versus their international peers) means that we will probably see a continuation of the staggering stock inflows that have propelled markets higher over the past 9 months. 

Despite the market volatility spurred by rising bond yields and inflation bets, equity funds attracted a record $68.3B in the week through March 17. According to BofA , year-to-date inflows are over $347B so far this year. On an annualized basis, additions will amount to a whopping trillion-dollar figure, smashing the previous record of $300B reached in 2017, per the forecast of strategists led by Michael Hartnett forecast.

By comparison, bonds have seen inflows of $110B this year, only a third of what stock funds have attracted.

We may be in a frothy environment, but these are all indicators that the ride isn’t over yet.

Q4 2020 Results for Recent SaaS IPOs

It’s important to look past the historically high overall valuations and look at the underlying fundamentals and performance of some of the actual companies and sectors in the market.

All companies in the S&P 500 have now reported FY2020 earnings and laid out guidance for FY2021. Overall, the S&P 500 has been reporting a strong earnings cycle, with Q1 EPS tracking to over 30% YoY growth (after a 14% decline in all of 2020), its best number ever and also well ahead of where expectations were at the start of the year.

Notably, publicly traded SaaS companies just had the best quarter in stock market history.

Here at PVC, we track all of the US-listed SaaS companies and monitor their financials and their trading performance. All told, we track 53 SaaS companies that have gone public since 2016 (we removed PluralSight last week, after its acquisition by Vista Equity, for about $3.5B, or 50% above its IPO price in July 2018). This is a basket worth over $760B in total market capitalization, generating $33.9B in annual revenue.

Collectively, this group of post-2016 SaaS would be one of the largest five companies in the world, by market cap. This group grew at over 90.6% YoY on a cap-weighted average in Q4 2020. The median company in this basket of recent SaaS IPO grew at 34% YoY.

That’s unheard of for any publicly traded sector, ever. And it happened in a quarter when overall US GDP contracted by about 2.5% annually (and when most European markets were down by about 5% annually).

Impact of Growth Rates on Valuation

The chart below shows how these multiples compare to the underlying annualized growth rates in annual recurring revenues (“ARR”). For most public SaaS companies, growth is by far the most important factor in determining the company’s trading multiple.

A few clusters emerge in the chart.

  • The first cluster is the “no growth” group, with sub-10% annualized growth. This group trades at between 2x and 7x trailing revenues.
  • There is also a second cluster of “low growth” companies with mid-teens growth rates, that generally command mid-teens multiples as measured dividing their Enterprise Value (“EV,” or market capitalization plus debt, less cash) by their “revenue run rate” of Q4 2020 revenues multiplied by 4.
  • Most of the recent SaaS companies are in a third grouping; these are “high-growth” group, with 20-50% YoY sales growth through Q4. They have an average EV / “revenue run rate” multiple of 23x. These companies are in a range between 15x at the low end and about 30x on the high end.
  • Finally, a set of “supercharged growth” companies have 50% annual revenue growth or higher. Twilio, ZoomInfo, Snowflake, Zoom, Zscaler, CrowdStrike, DocuSign, Cloudflare, Datadog, Asana, and Agora, Inc. all trade at premium multiples, ranging as high as 90x (in the case of Snowflake).

Of the 53 recent SaaS IPOs, all but four fall cleanly into one of these clusters. The outliers are Lemonade, Bill.com, C3.ai, and Bandwidth, Inc.

Bill.com is trading at over a 60x sales multiple, in line with the “supercharged growth” peer group, even though its growth rate (while an outstanding 38% YoY) is a tad below them.

C3.ai is Tom Siebel’s much-hyped AI company, and it seems to be commanding a richer multiple than its current growth warrants.

The other two are not displayed on Figure 3.

Lemonade is currently trading at over 60x forward revenues, despite reporting declining YoY growth in recent quarters. However, that is a result of an accounting change, so period over period results are not comparable; Q3 2020 marked the beginning of a change in how the company reports revenue from reinsurance policies, a result of changes in GAAP. The underlying KPIs are all growing at triple-digit rates, so this probably belongs in the “supercharged growth” high-flier category, where the multiple and growth are about right.

Finally, Bandwidth is a bit of a special case – they operate as a cloud-based software-powered communications platform-as-a-service (“CPaaS”) provider in the US. BAND is trading at just 7x forward revenues, despite growth of over 80%. They made an acquisition last year of international CPaaS Voxbone. Without that acquisition, revenue growth would have been more like 30% YoY. Even so, the market seems to value Bandwidth at a significant discount to its peers, perhaps assigning a measure of execution / integration risk to the new entity.

Figure 3. Mapping Public SaaS Recent IPO Multiples to Growth Rates
Source: CapitalIQ; company filings; PVC analysis

Conclusion

The past 20 years have seen some great public SaaS companies and very good returns for investors.

Currently, the index is near an all-time high of 19x EV / LTM for recent SaaS IPOs. On average, investors are paying higher multiples today for SaaS companies than at any other time in public SaaS trading history.

Investors in this category have been rewarded handsomely over the last 1, 5, and 15 years, and just experienced the best publicly reported quarter in stock market history.

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