High Peak Financial
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Blog

This blog is written by Austin Conner and covers a mix of business topics that interest me.

I am currently a contract CFO and have worked with companies in a number of industries.


What factor determines SAAS Public Valuations?

I was working on a valuation presentation and thought I would share a few of the charts that I put together.  If you do a google search on what determines SaaS valuation, you would see a lot of commentary on sales growth.  The companies here were selected from the Bessemer Venture Partners cloud index.  First, I looked at how the group has traded over the last four years.  In early 2016, it looked as if the bottom dropped out, but the group made a solid recovery over the summer.

Source: Morningstar data.

Source: Morningstar data.

The snapshot here in mid October 2016 gives a good overview. The index median Enterprise Value to Sales is 5.8x, just below the 3 year average.

Source: Morningstar and SEC.gov

Source: Morningstar and SEC.gov

It does look like there is a correlation between sales growth and EV to Sales Multiple. Let's look at a few more charts.  Below is a bar chart with companies grouped by sales growth (note: they aren't grouped into equal baskets). The bar chart below shows that high growth SaaS businesses are valued at a higher EV/Sales multiple.

With the scatter plot, we have an R-squared of 0.57, which implies a fairly strong relationship between sales growth and EV/Sales multiple.