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About the Author:
James Macdonald
Managing Director
James Macdonald is a managing director specializing in research and investment in software-as-a-service (SaaS) businesses and related business services. He uses his industry knowledge and expansive network to uncover promising investment opportunities and help companies navigate their strategic paths and accelerate growth. His work has been cited for excellence in the Wall Street Journal’s “Best on the Street” survey, in Forbes, and in other publications. Prior to joining First Analysis in 1997, he was a general manager at Nalco Chemical Co., where he played a key role in expanding Nalco’s service offering to include operating and leasing equipment at customer sites. This led to formation of a joint venture with U.S. Filter Co. Earlier, he was with a subsidiary of Ecolab Inc. He earned an MBA from Harvard University and a bachelor’s degree in civil engineering from Cornell University, where he also earned the university’s highest award in that discipline.
First Analysis SaaS Team
Matthew Nicklin
Managing Director
James Macdonald
Managing Director
Corey Greendale
Managing Director
Howard Smith
Managing Director
Richard Conklin
Managing Director
Andrew Walsh
Managing Director
David Gearhart
Vice President
Terry Kiwala
Vice President
First Analysis Quarterly Insights
Software as a Service
SaaS growth outlook and the pandemic effect
October 30, 2020
  • June-quarter year-over-year revenue growth rates for our SaaS universe slowed by 5.7 points on average from the March quarter, but the range of change was much wider, with Shopify's (SHOP) growth rate accelerating by 51 points and MiX Telematics' (MIXT) and CarGurus' (CARG) growth rates each dropping by more than 50 points. Companies like Shopify will likely face difficult comparisons in 2021, while other companies will have easy comparisons. Given SaaS companies are often valued based on multiples of revenue that reflect growth rates, the ability to normalize growth rates for pandemic effects will be an important determinant of valuation accuracy.
  • After strong stock price outperformance in the June quarter, our SaaS universe modestly underperformed in the September quarter, gaining an average 5.1% compared to an 8.5% gain for the S&P 500, with most of the pressure coming in the last month of the quarter following strong gains through August.
  • We have updated our graphs plotting enterprise value revenue multiples against growth. They show the impact of higher share prices and multiple expansion. The average 2021 multiple increased to 14.9 as of Oct. 19, 2020 from 11.7 last quarter due to higher stock prices despite similar expected growth rates. The average 2021 projected growth rate was 20.5% as of Oct. 19, 2020, similar to last quarter's 20.3%. As we will discuss, the 2021 growth rate may reflect easy comparisons. The valuation multiples reflect the impact of a select group of stocks viewed as pandemic beneficiaries; five companies had 2021 revenue multiples over 30.
  • We have added four names to our SaaS universe: Agora (API) and BigCommerce (BIGC) in the e-commerce sector, Ncino (NCNO) in vertical SaaS and Fastly (FSLY) in other. We note our SaaS universe is larger than ever at 64 names, with no takeovers having been announced recently. This could be due to the pandemic but may also be due to potential buyers being unwilling to pay much more than the historical maximum of about 10 times forward revenue.

TABLE OF CONTENTS

Includes discussion of AYX, CARG, CRM, CRWD, CSOD, DOCU, ECOM, FSLY, MIXT, RAMP, SHOP, SMAR, SQ, TENB, TWLO, YEXT, ZBRA

How to view growth comparisons in these uncertain times

EV to revenue multiples continue to rise, mostly at the high end

SaaS underperforms but several sectors beat the market

Public SaaS takeouts may reflect hesitation due to high valuations

Many large Q3 SaaS private placements

How to view growth comparisons in these uncertain times

By comparing year-over-year revenue growth rates in the June and March quarters, we can gain some insight into the impact of the pandemic on our SaaS companies. (We note that due to the company additions noted above, our March quarter to June quarter comparisons in this report are not entirely apples-to-apples for the aggregate SaaS universe metrics.) Using that imperfect basis, we found the pandemic negatively affected growth rates by 5.7 points on average as shown in Table 1. Since SaaS companies typically bill a similar recurring amount each month (often in advance) and the pandemic shut down was in the middle of March, we think there was minimal pandemic impact on March-quarter growth rates. And since some SaaS companies bill annually and have minimum annual contract durations that lock revenue in, June-quarter revenue growth probably still didn't reflect the full negative impacts of the pandemic. Likewise, for those companies for whom the pandemic increased demand, the positive impact may not have been fully reflected in the June quarter. Comparing analyst estimates for September-quarter revenue growth to June-quarter actual growth indicates another 5.3-point drop; however, we generally expect companies to beat analyst estimates, suggesting the actual decline will be less.

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