SaaS multiples at all time highs

SaaS comps have never been stronger: of the 93 SaaS companies we follow, the average public SaaS business is trading at 22.6x revenue while the median is 14.1x. Interestingly, the gap between the average and median is wider than ever (8.5x), meaning more attractive SaaS companies are being rewarded with big premiums. Also of note, 60% of companies are trading at 10x revenue or greater (all time high). The data is below.

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Negative EBITDA, positive cash flow. The median SaaS business had trailing twelve month revenue of $505mm, EBITDA of -$2mm, but positive operating cash flow of $61mm thanks to up-front collections on annual contracts. So long as you’re growing (the median annual growth rate is 24%), 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 14.1x with an average of 7.7x.

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 0%. 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, 56 companies trade at greater than 10x revenue, 45 trade at greater than 15x, and 35 trade at greater than 20x.

Growth is strong. The median of 24% is strong given the size of these companies ($505mm of median revenue).

SaaS businesses are healthy. There is almost no debt on these businesses (except McAfee) as banks don’t like ‘asset-lite’ businesses like software. Additionally, these companies have $424mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$2mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $61mm; only 20 out of the 93 companies have negative cash flow. Note that 46 out of the 93 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: is at 68x, Cloudflare is at 59x, Datadog is 58x, Crowdstrike is 63x, Zoom Video is at 54x, C3 is at 80x, Unity is at 55x, and Snowflake is at 166x (not a typo). 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 (Datto is at 10x, McAfee is at 4x but highly levered), so the disparity in valuation for premium SaaS versus just good SaaS is very wide.

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