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In case you missed it, LinkedIn, Salesforce and Workday lost a combined $18B in market cap in one day. Why did this happen? All 3 companies are growing revenue with sticky customers in large addressable markets. The problem is enterprise software companies typically trade at a ~4x multiple on forward revenues, where as SaaS multiples peaked in 2013 at 13x. As revenue growth rates have slowed trading multiples have compressed.
Public SaaS companies have largely met growth expectations and performed according to Wall St. expectations. The problem is that investors already paid for the projected revenue growth in many SaaS stocks a full 2 years earlier. Let’s look at historical multiples of Enterprise Value / Forward Revenue for the past decade. As you can see below, enterprise software multiples have largely held steady at 3-4x forward revenue. However, SaaS multiples began diverging in 2012 from their historical range of 5-6x forward revenue. This divergence peaked at the end of 2013 and has remained elevated above historical averages for 2 more years. The Black Friday correction brought SaaS multiples back in-line with enterprise software valuations. Like many corrections, the market has overshot to the downside as we at Emergence believe long term SaaS valuations of 5-6x forward revenue will return.
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