PVC SaaS Index™ | Q4 2024 – SaaS Multiples Rebounding

A Practical Summary:

• The PVC SaaS Index™ is now trading at 7.7X sales, a big jump from 6.1X in Q2.
• Multiples are still slightly below the 5- and 10-year averages of ~8X.
• These lower multiples reflect a slowing growth rate in the industry.
• Recent optimism from the Trump / GOP sweep and lower Fed rates has contributed to an “Everything, Everywhere, All at Once” rally since early September.

Every quarter, we update our PVC SaaS Index™, a basket of publicly traded US-listed SaaS companies. This index provides a useful benchmark for how private companies should be valued when they find exits.

Software as a Service (“SaaS”) has been around longer than the cool new cloud. While the SaaS category shares some aspects of cloud computing, 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. Twenty years later, we now have 101 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.

For this update, we have removed several SaaS companies that recently went below $500M market cap, essentially becoming broken IPOs or “zombies” in the public markets, with low liquidity, high volatility, and uncertain public company prospects: Agora, CS Disco, Expensify, and Presto Automation.

The historical EV / TTM (“enterprise value” to “trailing twelve months” of revenue) going back to 2014 is shown below.

Between Q3/20 and Q4/21, the revenue multiples of SaaS companies rocketed to all-time highs, fueled by pandemic-era fiscal and monetary stimulus primarily from the US, ECB, China, Canada, UK, and Japan, peaking around 18-19X EV / TTM revenues in late 2021. By mid-2022, multiples had dropped to 6-8X. As of Q2/2024, they continue to trade at the low and of this range.

The multiple of 7.7X in Q4/24 is now up significantly from the recent trend. SaaS multiples were around 7X in Q4/23 and 6.2X in the summer of 2024. Multiples are now just slightly below the 2016-2019 levels, when SaaS multiples averaged about 8X, so I think this represents a normalization of multiples into the historical range of about 7-9X.

The top quartile of SaaS companies (those whose multiples are higher than 75% of the group) is now at about 12.5X, which is above where they were for most of the 2016-2019 period.

The uptick in SaaS valuations began around the middle of September 2024. The stocks in the PVC SaaS Index® bottomed out in late August and have since rallied 41% (from August 7 through December 4, 2024). That timing roughly corresponds to the broader market rally, but smaller cap tech stocks have outperformed. Since August 7, the S&P 500 is up +17%, while the tech-heavy NASDAQ Composite (dominated by the “Magnificent Seven” large cap tech stocks) is up +20%.

Growth Slowing in Q3

Much of this multiple compression can be attributed to slower growth rates that we have seen in SaaS companies since the end of 2021. The chart below shows that since the middle of 2021 the median growth rate in our index of publicly traded SaaS companies has dropped from the mid-30% range into the high teens. As growth has slowed, multiples have fallen by almost two-thirds from the heights they hit during the 2021 “Everything, Everywhere – All at Once” bubble, which was catalyzed by Western governments and their post-COVID spending binge, financed by trillions in printed money from the Fed, ECB, Bank of England, and Bank of Japan.

However, there is some good news on the horizon, which has contributed to the recent rally.

Of the SaaS companies that have reported so far, their aggregate quarterly net new ARR added is the highest it has been in the last ~3 years (see Figure 3). Even better, of the 65 companies that have reported and provide quarterly guidance, all have beaten guidance, The median beat of consensus estimates was 2.2% (that’s the highest since Q2/22). The median guidance raise for Q4 was 0.3% (highest since Q1/22).

This improvement in growth has NOT come at the expense of profitability. In Q3/24, the median free cash flow margin in our index was +11%, up smartly from +1% in Q3/22 and -1% in Q3/21.

The Return of the “SaaS Buyer”

One other trend worth noting is that the software spend recession of 2022 and 2023 seems to be fully behind us now. Remember when everyone was tightening their belts and “doing more with less” was the mantra du jour? Well, it looks like the pendulum is swinging back. SaaS spend rebounded by 9% across all company sizes in 2024, according to the 2024 SaaS Benchmarks Report from High Alpha.[1]

In particular, the increase in software spend seemed to have come from smaller companies with fewer than 500 employees, which usually corresponds to tech companies with less than $500M in revenues. So, while belt-tightening among the biggest SaaS customers drove a consolidation in seats and spend in 2022 and 2023, the customer base is diversifying and expanding in 2024 for the typical SaaS company in our index.

Conclusion

Between Q3/20 and Q4/21, the revenue multiples of SaaS companies rocketed to all-time highs, fueled by pandemic-era fiscal and monetary stimulus primarily from the US, ECB, China, Canada, the UK, and Japan, peaking around 18-19X in late 2021. By mid-2022, multiples had dropped to 6-7X EV / TTM revenues, and as of Q2/24, continue to trade at the low end of this range.

In the most recent quarter, multiples have expanded back to 7.7X. These multiples are now JUST slightly below the 5- and 10-year averages for SaaS multiples, which are around 8-9X.

Q3 earnings season is now behind us, and a review of the earnings reports from the 100 companies on our PVC SaaS Index suggests that a significant slowdown in revenue growth for these companies is underway. Throughout 2021 and well into 2022, SaaS companies were growing revenues at over 30%, but over the past 3 quarters, the median growth rate in our index has been around +17% YoY.

That slowdown may be in part due to a macro slowdown in the US, as well as in major markets for SaaS companies. Germany, Japan, and the UK all experienced mild recessions in 2023, while Canada narrowly avoided one.

However, something interesting has happened recently. Leading indicators suggest that companies are starting to lean back into growth, with net new ARR added by these companies hitting a 3-year high in Q3/24.

[1] The 2024 SaaS Benchmarks Report was originally produced by OpenView Venture Partners and is a definitive resource for SaaS founders looking to benchmark their companies’ performance against peers. To produce the report, High Alpha gathered survey responses from over 800 unique SaaS companies.