SaaS valuations down 24%
SaaS comps continue to be historically strong, but fell 24% from last quarter. Of the 123 SaaS companies we follow, the average public SaaS business is trading at 12.9x revenue while the median is 9.3x.
The gap between the average and median is 3.6x, meaning premium SaaS companies are getting outlier valuations, but that gap is lowest since Q1 2020, showing the correction in overvalued names. 47% of companies are trading at 10x revenue or greater. The data is below.
Negative EBITDA, positive cash flow. The median SaaS business had trailing twelve month revenue of $451mm, EBITDA of -$32mm, but positive operating cash flow of $41mm thanks to up-front collections on annual contracts. So long as you’re growing (the median annual growth rate is 25%), investors will overlook negative EBITDA especially if the business is cash flow positive after working capital changes.
The trend. The chart below shows median revenue multiples we’ve collected since Q4 2014. During that period, the median SaaS multiple has ranged from 4.6x to 14.1x with an average of 8.5x.
SaaS margins are still terrible. Investors and founders love saying “SaaS margins are great.” They’re not. They’re horrible. The median EBITDA margin for the companies above was -10%. Fixed costs for SaaS are terribly high and worse yet, those fixed costs are mostly people, meaning the only way to materially cut costs is layoffs.
Premium gets a premium. Premium SaaS businesses trade at premium multiples. In the data set, 58 companies trade at greater than 10x revenue, 35 trade at greater than 15x, and 22 trade at greater than 20x.
Growth is strong. The median of 25% is good given the size of these companies. The average is even better at 27%.
SaaS businesses are healthy. There is almost no debt on these businesses as banks don’t like ‘asset-lite’ businesses like software. Additionally, these companies have $452mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$32mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $41mm); only 35 out of the 123 companies have negative cash flow. Note that 67 out of the 123 have negative EBITDA, but again that’s acceptable so long as the growth is present and cash flow overall is positive.
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