Despite the current tumult, SaaS comps are showing unusual strength: of the 81 SaaS companies we follow, the average public SaaS business is trading at 10.6x revenue while the median is 8.1x. Interestingly, the gap between the average and median continues to be large (2.5x), meaning more attractive SaaS companies are being rewarded with big premiums. Also of note, 37% 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 $422mm, EBITDA of -$25mm, but positive operating cash flow of $45mm thanks to up-front collections on annual contracts. So long as you’re growing (the median annual growth rate is 26%), investors will overlook negative EBITDA especially if the business is cash flow positive after working capital changes.
The trend is still on. The chart in the picture shows median revenue multiples we’ve collected since Q4 2014. During that period, the median SaaS multiple has ranged from 4.6x to 9.49x with an average of 7.04x.
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 -6% and the average was -5%. 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. If you’ve ever fired someone, you know cutting costs by cutting people is not easy and hurts the culture and morale of remaining members.
Premium gets a premium. Premium SaaS businesses trade at premium multiples. In the data set, 30 companies trade at greater than 10x revenue, 21 trade at greater than 15x, and 11 trade at greater than 20x.
Growth is strong. The median of 26% is strong given the size of these companies ($422mm of median revenue).
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 $344mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$25mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $45mm; only 25 out of the 81 companies have negative cash flow. Note that 47 out of the 81 have negative EBITDA, but again that’s acceptable so long as the growth is present and cash flow overall is positive.
Recent IPO’s are killing it. Some of the latest IPO’s are trading at unreal multiples: Bill.com is at 19x, Cloudflare is at 21x, Datadog is 26x, Crowdstrike is 24x, Slack is 24x, and Zoom Video is a whopping 62x. It shows that now is a great time to come to market whether you’re raising money or selling the business. Some recent IPO’s are trading at more reasonable multiples (HealthCatalyst is at 5x and Ping is at 6x), so the disparity in valuation for premium SaaS versus just good SaaS is very wide.
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