Clouded Judgement: Q2 SaaS Earnings Preview & Valuation Sustainability Analysis
The article argues that SaaS valuations, despite reaching all-time highs (13.3x median forward multiple, 28.1x for high-growth companies), are sustainable because forward earnings estimates are artificially depressed relative to actual growth potential driven by accelerated digital transformation from COVID-19. The author identifies four reasons for optimistic long-term SaaS growth: early cloud adoption (20% penetration), larger-than-anticipated market sizes, superior unit economics (net retention), and disproportionate winner-take-most dynamics favoring category leaders termed "Secular Growth Stars."
Metrics in this report
25%percent
Percentage of application workloads running in cloud versus on-premise infrastructure
20%percent
Percentage of enterprise IT spending allocated to cloud versus on-premise infrastructure
130%percent
minimum
Datadog's published NRR metric as cited example of Secular Growth Star
28.1xmultiple
median
High-growth SaaS companies (projected 30%+ growth) as of July 2020
18.0xmultiple
median
High-growth SaaS companies as of July 2019
8.0xmultiple
median
Low-growth SaaS companies as of July 2020
14.0xmultiple
median
Mid-growth SaaS companies as of July 2020
13.3xmultiple
median
Public SaaS companies as of July 2020
10.5xmultiple
average
Public SaaS companies (1-year average) as of July 2020
$2Bdollars
Shopify's annual revenue at time of publication
$100Bdollars
greater than
Shopify market cap as of July 2020
27%percent
NTM growth estimates for Twilio as of July 2020
68%percent
Twilio's LTM growth rate leading into Q2 2020