24 Mar Hide Out In Lower Multiple SaaS Names During COVID19?
With a special thanks to the legitimately amazing Koyfin app, we examine how a basket of lower revenue multiple SaaS stocks have performed against their higher multiple direct comparables during the COVID-19 market decline.
Seriously though, go sign-up for Koyfin – our sales pitch: like having Bloomberg and CapitalIQ for free. No affiliation here, just satisfied users.
Our approach focused on directly comparable SaaS platforms (e.g. very similar vertical or product use case) to better examine if a “value” (or even pair trade) approach would work.
Our approach has the disadvantage of eliminating a number of leading platforms (like Smartsheet, Shopify, Avalara, and Veeva) since they do not have a publicly-traded peer.
These valuation comparisons are also illustrative of the valuation premium “market leaders” can achieve.
Now to the data:
Datadog vs New Relic: High Multiple Outperforms (1 Month Delta: 370 bps)
- Datadog
- YTD Stock Performance: -12.9%
- 1 Month Stock Performance: -28.0%
- Forward Revenue Multiple on 12/31/2019: 22.4x
- Forward Revenue Multiple on 03/23/2020: 16.7x (25% multiple decline)
- New Relic
- YTD Stock Performance: -38.2%
- 1 Month Stock Performance: -31.7%
- Forward Revenue Multiple on 12/31/2019: 5.6x
- Forward Revenue Multiple on 03/23/2020: 3.2x (43% multiple decline)
Blackline vs Workiva: High Multiple Outperforms (1 Month Delta: 930 bps)
- Blackline
- YTD Stock Performance: -3.9%
- 1 Month Stock Performance: -24.2%
- Forward Revenue Multiple on 12/31/2019: 8.1x
- Forward Revenue Multiple on 03/23/2020: 7.4x (9% multiple decline)
- Workiva
- YTD Stock Performance: -25.5%
- 1 Month Stock Performance: -33.5%
- Forward Revenue Multiple on 12/31/2019: 5.5x
- Forward Revenue Multiple on 03/23/2020: 3.8x (31% multiple decline)
Hubspot vs Sharpspring: High Multiple Outperforms (1 Month Delta: 1,490 bps)
- Hubspot
- YTD Stock Performance: -31.8%
- 1 Month Stock Performance: -41.9%
- Forward Revenue Multiple on 12/31/2019: 8.2x
- Forward Revenue Multiple on 03/23/2020: 5.1x (38% multiple decline)
- Sharpspring
- YTD Stock Performance: -48.6%
- 1 Month Stock Performance: -56.8%
- Forward Revenue Multiple on 12/31/2019: 4.4x
- Forward Revenue Multiple on 03/23/2020: 2.0x (55% multiple decline)
Twilio vs Bandwith: Low Multiple Outperforms (1 Month Delta: 830 bps)
- Twilio
- YTD Stock Performance: -8.7%
- 1 Month Stock Performance: -27.2%
- Forward Revenue Multiple on 12/31/2019: 8.9x
- Forward Revenue Multiple on 03/23/2020: 7.6x (15% multiple decline)
- Bandwith
- YTD Stock Performance: -2.9%
- 1 Month Stock Performance: -18.9%
- Forward Revenue Multiple on 12/31/2019: 5.2x
- Forward Revenue Multiple on 03/23/2020: 4.8x (8% multiple decline)
Zendesk vs Medallia: Low Multiple Outperforms (1 Month Delta: 520 bps)
- Zendesk
- YTD Stock Performance: -27.3%
- 1 Month Stock Performance: -35.4%
- Forward Revenue Multiple on 12/31/2019: 8.8x
- Forward Revenue Multiple on 03/23/2020: 6.1x (31% multiple decline)
- Medallia
- YTD Stock Performance: -31.7%
- 1 Month Stock Performance: -30.2%
- Forward Revenue Multiple on 12/31/2019: 8.1x
- Forward Revenue Multiple on 03/23/2020: 5.0x (38% multiple decline)
RingCentral vs 8×8: High Multiple Outperforms (1 Month Delta: 1,290 bps)
- RingCentral
- YTD Stock Performance: +13.6% (the rare security UP in 2020!)
- 1 Month Stock Performance: -18.8%
- Forward Revenue Multiple on 12/31/2019: 13.9x
- Forward Revenue Multiple on 03/23/2020: 14.8x (6% multiple improvement – the equally rare multiple expansion!)
- 8×8
- YTD Stock Performance: -24.8%
- 1 Month Stock Performance: -31.7%
- Forward Revenue Multiple on 12/31/2019: 4.0x
- Forward Revenue Multiple on 03/23/2020: 3.1x (22% multiple decline)
SUMMARY
Summarizing these 6 comparisons, the higher multiple names have outperformed in 4 of 6 examples with an average 1-month stock price outperformance of 4.5% in total.
On average:
- the higher multiple names saw their multiples contract by ~18% – 20%
- their lower multiple comps saw their multiples compress by ~33% – 35%
Clearly, the sample size here is limited.
And these comparisons are imperfect – Twilio (due to the acquisition of SendGrid) has a different profile versus Bandwith; there are material differences between the Zendesk and Medallia customer bases.
There are also security level differences (stock trading liquidity, recent earnings, recent guidance, shareholder base) that are likely influencing these findings, especially in a volatile market.
2020 VERSUS PRIOR DRAWDOWNS USING MORGAN STANLEY DATA
Multiple comparisons based on quantitative groupings (like “high growth” names defined as above 20% growth) are widely available.
That said, we wanted to share a series of graphics from the software team at Morgan Stanley covering prior market downturns that could be instructive for navigating today’s volatility.
Key excerpts of their March 11th industry report:
With comparisons to prior SaaS drawdowns:
Combining Morgan Stanley’s downturn work with our 2020 case study comparison approach, we see that a higher multiple basket saw greater multiple compression during the previous 4 SaaS drawdowns:
The dialogue boxes reflect the delta between changes in relative multiples – for example, the 2014 downturn saw high growth multiples contract by 49% while the overall Morgan Stanley Software group saw multiples decline by 27%, equating to a delta of 22%.
As we saw in our COVID-19 real-time demand study, the 2020 drawdown is showing unique dynamics with remote work apps breaking out while the rest of SaaS sees a ~20% drop off in real-time interest:
We don’t have a strong recommendation on whether it is advisable to hide out in lower multiple names during drawdowns.
That said, we wanted to highlight an excellent graphic from Battery Ventures “Software 2019” report:
The rise in software private equity activity might be raising the floor multiple, thereby changing the possible relative risk-reward calculus. Said another way, the “Vista/Thoma Bravo put” exists for 5x revenue names, not 14x revenue names.
Note: Data presented current through market close on March 23, 2020.