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It took me a moment to realize that the plot showing current market capitalization multiples versus gross margin for SaaS companies is not showing earnings mult
by cs702 7y ago
It took me a moment to realize that the plot showing current market capitalization multiples versus gross margin for SaaS companies is not showing earnings multiples, nor EBITDA multiples, nor gross margin multiples for that matter.
That plot is showing revenue multiples ranging from 10x to 50x. In other words, for every dollar of revenues today, it seems shareholders expect many dollars of actual honest-to-good net profits in the future. Alas, many companies on that plot, in fact, reported net losses over the past 12 months.
Let's hope for the sake of these companies, and for the sake of their shareholders, that aggressive spending to fuel growth today ultimately produces future profits that justify those revenue multiples.
- texasbigdata 7y agoAgree. While not an expert, I've tried the regression the author has done with CapitalIQ before. There's a third hidden axis which is whatever you want to define size/maturity/runway to be. That potentially explains some of the lift in multiple as well. Similarly his example of investors not paying attention to gross margin seems a bit stretched. While I've never personally participated in a venture deal, pre-public private equity investors scrutinize gross margin a lot, and so does equity research converign listed firms. While conceptually interesting, saying that a 30% EBITDA company that adds 1500 basis points of COGS goes to 15% margins and therefore ROIC falls (or valuation) is relatively boring. But his point about margins persevering post IPO was super interesting. I wonder if for the existing incumbents, after entry of one of these sexy unicorns, gross margin goes down after...