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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
Senior Vice President
Terry Kiwala
Vice President
First Analysis Quarterly Insights
Software as a Service
SaaS universe guidance looks conservative again for 2021
April 9, 2021
  • The 22.3% average 2021 revenue growth guidance for our SaaS universe (excluding vertical SaaS and other) is 9.6 points lower than average actual 2020 revenue growth. Typically, this initial guidance proves conservative. Even in the pandemic year of 2020, actual growth was 4.6 points better than initial guidance that suggested 2020 revenue growth would be 10.9 points less than in 2019. As we have noted before, we believe the pandemic reduced the average growth rate for our SaaS companies by 5-6 points (albeit with some notable variance among the constituents). Twelve companies have not yet provided 2021 guidance, including three with June fiscal years that would normally have provided guidance around July 2020.
  • We have added recent IPO C3.ai (AI) to our SaaS universe and removed Pluralsight (PS) and Slack (WORK), both as a result of acquisition. In March, Talend (TLND) agreed to be acquired by Thoma Bravo for $66.00 per share.
  • SaaS stocks gave back gains in the second half of the March quarter after a strong start to the year. With market momentum shifted to value names, our SaaS stocks dropped an average 8.4% for the March quarter compared to a 5.8% gain for the S&P 500. The average enterprise value multiple of 2021 estimated revenue dropped to 16.0 from 17.6 last quarter. Some lower-multiple SaaS names saw notable gains, such as Mix Telematics’ (MIXT) 9.5% and ChannelAdvisor’s (ECOM) 47.4%. Talend gained 66.0% due to the proposed acquisition.

TABLE OF CONTENTS

Importance of the growth curve

Revenue multiples shrink, correlation with growth rates strengthens

Q1 SaaS performance lags S&P 500

Importance of the growth curve

While it is easy to look at a company’s current growth rate, we continue to believe the most important factor in valuing SaaS names is a view on how revenue will grow over the long term (what we call the growth curve). Since revenue growth tends to slow over time as companies get larger, the key question is how quickly will growth decay? For 2021, our SaaS universe (excluding vertical SaaS and other) is guiding to a significant 9.6 percentage point growth rate decline, to 22.3% in 2021 from 31.8% in 2020 as shown in Table 1 (a 30.0% decay rate). In 2020, the actual decay rate was 16.4% (reflecting a 6.3 percentage point decline from 2019 growth). As we noted in our previous two reports, we estimate the pandemic had a 5-6 percentage point negative effect on growth despite some headline companies having seen growth accelerate due to the pandemic.

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