TOMASZ TUNGUZ
venture capitalist at redpoint
 

The Correction in SaaS Company Valuations

If you visit Yahoo Finance today, type in the ticker of every SaaS stock, copy and paste the image into a document, you might create a chart that looks like the one above. A cursory glance at the plunging lines in most of these names might send you into a panic, only to tweet in alarm that the bottom is falling out of the SaaS market. Chicken little. Chicken little.

The problem with the chart above is the y-axis. In the chart above, the data isn’t presented with the right perspective. The y-axis should go to zero at the bottom. Below is a chart that accurately shows the trends. Far less alarming.

Nevertheless, there seems to be a correction impacting the public SaaS market. The median SaaS stock has fallen 23% from its high over the past 9 months. Every stock but LogMeIn has fallen in that period. Notably, Rally Software has fallen by 54% and Jive by about 56%.

Despite this recent downward pressure, these SaaS companies have actually increased their value in the trailing nine month period by 21%, on average. Additionally, SaaS companies still command a 9x Enterprise Value-to-Revenue multiple, likely one of the most generous multiples of most sectors in the market.

Whether this correction is a short term, aberration or long-term repricing is challenging to say. Regardless, SaaS companies are still darlings of the public markets.


Published 2014-04-09 in SaaS  benchmarks  Data Analysis 

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