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SaaS Benchmarks — What’s Happening with Valuations?

By May 22, 2014Article

SaaS valuations are in turmoil. Salesforce’s market cap dropped by 7.01 in one day at the end of April without any news or announcement by the company to warrant negativity. The Motley Fool now says Salesforce shares will soar to $65. Goldman Sachs reported as of April 30, 2014 that the SaaS stocks in their coverage were down 37 percent in the multiple of NTM EV/Sales: from 7.1x on average since 2010 to 6x NTM EV/Sales now. By the second week of May, Internet and biotech stocks were leading a major stock market rally. Is the infatuation with SaaS over or stronger than ever? 

Bubble or not 

Talk of the SaaS bubble bursting brings back bad memories of the Internet crash in 2000 and 2001. That crash was caused partially by massive investments in Internet companies with unproven business models, even while the Internet and Internet technologies were revolutionizing — literally — the whole world. The Internet was here to stay, just unproven business models with no clear revenue models. Unfortunately, all companies were tarnished with the same brush at the time (together with a loss of overall investor confidence due to 9/11, two wars, etc.). 

Out of the crash arose the SaaS and cloud phoenix, transforming how technology and services are consumed and how tech company performance is analyzed. Recent market caps have competed with the loftiest of the Internet-hyped valuations. 

A more nuanced analysis of these investor movements may be to view them as an evolution from the giddiness associated with a hot, new trend and limited understanding of what drives a successful SaaS business model, to a sharper focus on revenue growth and the drivers of profitable customer acquisition, coupled with a large market opportunity. 

Successful SaaS companies receiving extremely high revenue-to-market cap multiples — up to 20 times revenues — up through the beginning of this year have cast a blessing over the sector as a whole and contributed also to strong venture activity in private SaaS startups over the past two or more years. The successful SaaS firms have proven they can stake out significant market presence, deliver double-digit revenue growth consistently and execute to continuously add and maintain subscribers/customers. 

However, moving into mid-2014, companies lacking a clear picture of an efficient revenue machine may no longer benefit as much from overall investment in the sector. 

Multiples increasing in 2013, then choppier in Q1 2014 

We compared the revenue-to-market cap multiple of 28 public SaaS companies for Q1 and Q4 of 2014 and Q1 of 2014. For almost all companies, the multiple improved from the beginning of 2013 to the end of 2013, reflecting the overall stock market’s performance last year, and SaaS stocks specifically.  

SaaS Benchmarks Fig 1

OPEXEngine Financial Insights Reports 2014, All Rights Reserved 

We can see that the revenue-to-market cap multiple for most companies was higher in Q4 2013 than in Q1 2013, with a few exceptions like Carbonite, Ebix, Jive Software, Medidata and Vocus. 

When you add in the data for Q1 2014, the sector trend is less straight-forward. Multiples were reduced for many companies, while some companies continue to increase. 

SaaS Benchmarks Valuation Fig 2

OPEXEngine Financial Insights Reports 2014, All Rights Reserved 

Is revenue growth the perfect indicator of market cap? 

The correlation between annual revenue growth and the revenue-to-market cap multiple has increased over the past year and has increased further in Q1 2014. In Q1 2013, the correlation between the two was about 38 percent. By Q4 2013, it had increased to 53 percent, and by the end of Q1 2014, it had increased to 61 percent. 

SaaS Benchmarks Valuation Fig 3

OPEXEngine Financial Insights Reports 2014, All Rights Reserved 

What about gross margins? 

At its simplest, gross margin tells you how much a company retains of each dollar of sales to service its other costs and obligations. The original promise of the SaaS business model was that, with economies of scale, the cost of serving additional customers should get lower and lower, implying that very high gross margins would result. Currently, most of the public SaaS companies have gross margins in the band between 60-80 percent. 

The correlation between the revenue-to-market cap multiple and gross margin is very low, only about 0.03 (three percent). This means that with an increase in gross margin, all other things being equal, the revenue-to-market cap multiple increases only three percent of the time. Thus an increase in gross margin, on its own, is not a good predictor of increasing valuation in the market today. This most likely is because investors see the SaaS market continuing to grow rapidly and are investing in those companies positioned to scale with the market opportunity, which requires continuous investment.

SaaS Benchmarks Valuation Fig 4

OPEXEngine Financial Insights Reports 2014, All Rights Reserved 

In Q1/14, gross margin is still not correlated with the Revenue-to-Market Cap Multiple but has increased slightly from three percent to eight percent. 

SaaS Benchmarks Valuation Fig 5

OPEXEngine Financial Insights Reports 2014, All Rights Reserved 

What is more interesting and consistent is that in both quarters, the companies with the highest multiples have gross margins around 70 percent. The companies with the highest gross margins are not being rewarded by the market for their focus on margin, nor for that matter, the companies with the lowest. 

We’ve seen in the OPEXEngine benchmarking that most of the very high-growth SaaS companies have SaaS product gross margins in the 80 percent range. But consulting services, which often are used as a way to bring on more customers and ensure customer satisfaction, is managed at cost or even below cost and brings overall gross margins down to the 70 percent range. 

Key takeaways 

SaaS multiples grew steadily during 2013 for most companies. But so far in 2014, SaaS valuations are not continuing to rise on the whole for the sector as they did in 2013. Revenue growth continues to be a significant factor in market valuation and appears to be even more correlated with market cap than last year. For the past two quarters, the companies with the highest valuations have gross margins around 70 percent.  

OPEXEngine’s Financial Insights Reports and the Software and SaaS Benchmarking provide comprehensive financial comparisons for peer companies and are used by hundreds of companies to analyze their performance. 

Lauren Kelley is CEO and founder of OPEXEngine. She brings 25 years of tech company management experience to OPEXEngine, as well as six years as an international economist at the U.S. Department of Commerce’s Office of Computers. She managed worldwide sales and strategic development for ecommerce pioneer, Art Technology Group, managed 20 countries for Borland Software, and helped build Compaq Computer’s business in Eastern Europe in the early 1990s. Ms. Kelley is currently based in Boston and has previously lived and worked in London, Paris, Munich, Bonn, Berlin, Kingston, Jamaica and Cleveland, Ohio. Contact her at







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