PVC SaaS Index™ | Q1 2023 – SaaS Companies Are Now a Bargain vs. S&P 500
The PVC SaaS Index™now trades at 6.9x EV / LTM revenue, slightly up from the 6.3x multiple that we observed at the end of Q4 2022, which was the lowest multiple since early 2017.
Over the past 5 years, the index has averaged 10-11x, so it is now 35% below that level.
SaaS companies represent the best relative bargain compared to the S&P 500 than they have in years. While SaaS companies are trading well below their 5-year average (and roughly in line with the 10-year average), the S&P 500 has moved into what we call a “Danger Zone” because the PVC Equity Risk Premium™ over BBB bonds is at the lowest point since 2007.
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.
Background: SaaS Multiples in Public Markets
Software as a Service (“SaaS”) has been around longer than the cool new cloud. The SaaS category shares some aspects of cloud computing, but its focus tends to be clearer: SaaS is 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. Almost 20 years later, we have more than 100 pure-play SaaS/cloud companies in our proprietary PVC SaaS Index™. These companies all trade on the NASDAQ or the NYSE. They derive most of their recognized revenues from long-term contractual commitments (12 months or greater) and recognize those revenues periodically over the life of those contracts.
As of Q1 2023, we have removed several SaaS companies from the index that have gone below $1B market cap, essentially becoming broken IPOs or “zombies” in the public markets, with low liquidity / high volatility and uncertain public company prospects. These companies include Blend Labs, OneSpan Inc., Sumologic, Agora Inc., Presto, and Weave Communications Inc. A few other companies have recently delisted by being acquired and going private again. That currently leaves us with 105 publicly traded SaaS companies in the US. No new companies were added to the index this quarter.
The figure below shows the historical EV / TTM (enterprise value to trailing 12-month revenues) going back to 2014.
The multiple of 6.9x is Q1 2023 is exactly the same as the median SaaS multiple in early 2017. The top quartile of SaaS companies (those whose multiples are higher than 75% of the group) are now at 10.8x, just slightly higher than they were back in 2017. That elite group has fallen by about 60% from its peak, set during the period from Q4 2020 to Q2 2021.
Performance of SaaS Stocks in Q1
Fundamentally, this SaaS group on average is delivering outstanding growth and results in the public markets. With most of the companies now reporting their Q4 results, we looked at the YoY growth in revenues delivered by these companies. The median SaaS company reported a 24% YoY increase in revenues in Q4 2022; the top quartile of fastest-growing companies grew at +38% YoY, which is extremely rare to find for a whole sector of public stocks.
Broader US S&P 500 Now in the Danger Zone
SaaS stocks now seem relatively cheap on a historical basis. Their EV / sales ratio is below where it has trended on average for the last 5, 10, or 15 years. Meanwhile, US stocks have recently entered a “Danger Zone.” Because of their risk and volatility, equities typically offer a premium over fixed-income securities, an equity risk premium that provides additional reward for investors in exchange for the higher risk.
Compare the S&P 500Earnings Yield (which is the sum of retained earnings for those stocks plus the dividends that they pay out on a trailing 12-month basis) to the Effective Yield of BBB-rated corporate bonds in the ICE Bank of America Index and you can see that on average equities provide a 10-200 bp advantage over bonds. We call this the PVC Equity Risk Premium™.
Equity Risk Premium = difference between the S&P 500 Earnings Yield and the BBB Bond Yield
S&P 500 Earnings Yield (or inverse price-earnings ratio) = trailing 12-month earnings divided by index price
BBB Bond Yield = effective yield of the ICE BofA BBB US Corporate Index
As corporate bond rates have soared since the start of the year, the PVC Equity Risk Premium™ has dropped to the lowest reading since 2007, which means that the tech sector represents a relative bargain when compared to the rest of the market.
Aman was the COO of 500 Startups, has been the CFO of Sonos, and led finance at PayPal. Before that, Aman worked at Lehman Brothers and McKinsey, majored in economics at Stanford, and earned a law degree from Harvard, so he is particularly good at dollar signs and clauses and commas.
Aman has more than 15 years of financial and operational experience from both private and public technology companies. He has been a member of the management teams at some of the most successful companies in the world, including PayPal, eBay, and Sonos.
Prior to PVC, Aman was the COOof 500 Startups, which during his tenure was the world’s most active VC firm, measured by the number of investments made. Aman managed 500’s global fundraising team, the seed accelerator team, and the Series A growth programs. He also managed the Investment Committee for the firm’s global funds ($500MAUM).
Aman led the strategy teams at both PayPal and eBay Marketplaces and served as the divisional CFO of eBay’s North American Marketplace business, which generated over $2B in revenues and nearly $1B in operating profit.
As CFO, Aman has guided his companies to over $1B in debt and equity financings from family offices, HNWIs, VC/PE funds, banks, and public markets.
CFA since 2000
Financial Analyst at Lehman Brothers, Associate at McKinsey
Taught Economics at Harvard University
JD, Harvard Law School
BA, Economics and Public Policy, Stanford University
PayPal Mafia: wrote the first draft of PayPal's S-1 in the winter of 2000.
CFO at two different unicorns: Sonos, Inc. (NASDAQ: SONO) and CAN Capital