History of Public SaaS Returns and Valuations
Since Salesforce went public in 2004, there have been almost 70 other pure-play SaaS/cloud companies that have followed them in the public markets, and more and more go out each year. In 2018 alone, which was a banner year for SaaS IPOs, there were 16 high-growth SaaS companies filing S-1s. Many private SaaS companies believe that an IPO and/or reaching $100M in revenue or ARR (annual recurring revenue) is the end state when in reality SaaS companies demonstrate staggering returns in the public markets well beyond $100M in revenue. The United States economy, as well as the global economy, have recovered dramatically since the 2008/2009 Great Recession, but SaaS companies on average have outperformed the broader market by a massive margin. The two “SaaS Crashes” post-Great Recession have occurred in early 2014 and early 2016, and apart from those two time periods, it’s been mostly up and to the right. Given all the recent IPOs and high trading multiples, it’s interesting to look at the historical performance of each public SaaS company.
Most high-growth SaaS businesses (public and private) are valued on a multiple of forward revenue with enterprise value over NTM (next-twelve-months) as a primary metric. What is the right price for a high-growth public SaaS company? The all-time average has been ~8x but more recently the weighted NTM revenue multiple for all high-growth SaaS companies is ~15x, which has been propelled by recent IPOs like Zoom (ZM), CrowdStrike (CRWD), and Slack (WORK) which are trading at high NTM revenue multiples — ZM at 41x, CRWD at 34x and WORK at 28x (as of 9-July-2019). In the recent week or so, the high-growth SaaS weighted multiples have finally eclipsed the Q1'2014 highs.
Given where we’re at in the market cycle — which seems like a 10+ year SaaS bull run — I wanted to dig into the trading history of each pure-play SaaS/cloud IPO and how they have traded from inception → today. For the purposes of this analysis, I left out companies like Microsoft and Adobe and only included high-growth, pure-play SaaS/cloud companies that have gone public in the past 15 years — Salesforce is the first company in this comparable set. I looked at all 70 SaaS companies that have filed S-1’s publicly and tracked the trading history from IPO → today (or when they were acquired). 67 of them made it to trading as AppDynamics, Adaptive Insights, and Qualtrics were acquired days before trading.
Below are logos of all the companies used in this analysis (sorted by IPO date from left to right):
The returns for these 70 or so companies have been extraordinary, particularly for the companies that are still independent. Below is a chart showing the multiple returns over IPO price for the 51 independent companies. The average return is 5.3x, and on average this group of companies has only been trading for only 3.4 years. The IPO month and year are below each ticker.
What about for the 16 companies that have been acquired post-IPO? The average return for those businesses has been 2.8x, lower than the independents. See the chart below which outputs the multiple returns over IPO price for the acquired businesses.
The average return for all 67 pure-play SaaS/cloud companies that have traded publicly is 4.7x from IPO price as of 9-July-2019.
It’s clear that going public is just a milestone for the vast majority of SaaS companies as they accrue significant value in the public markets. With that said, we’re in a bull market and valuation multiples have expanded significantly over the past few years (more on that below), but the numbers are the numbers. In aggregate this group of companies has created ~$640B of cumulative market cap in the past 15 years. Some of these companies have been acquired and their market cap is no longer in this data or has been subsumed by others — for example, Salesforce acquired MuleSoft — but it’s gone from ~$2B in 2004 to $640B+ today, an increase of almost 400x from its initial market cap.
Taking a look at cumulative NTM (next-twelve-months) revenue for this same group, it’s gone from ~$200M to $55B+ today, an increase of over 300x. The number increased almost 3x over the past 3 years alone. Again, this includes acquired companies that have been subsumed by others in the comparable set or taken out completely.
Valuation
I also wanted to dig into the valuation multiples for this same set of companies. Given most SaaS companies are valued on a multiple of forward revenue (NTM or next-twelve-months), EV or enterprise value / NTM revenue multiples are a great way to look at valuations over time. The below chart shows market-cap weighted NTM revenue multiples over the past 15 years along with the average and median. As I mentioned before, we have just eclipsed the historical 2014 highs in the past week or so, which has largely been driven by large and fast-growing companies like Zoom, Slack, and CrowdStrike. The historical average market-cap weighted NTM revenue multiple has been 7.6x.
As I mentioned, the returns of this group of companies over the past 15 years have been massive. The chart below indexes the market cap weighted indexed stock price return for every SaaS/cloud company that has traded publicly (starting from their first close →today or acquisition) which comes out to 1,100%+. For reference, the Dow Jones, Nasdaq, and S&P 500 indexes are also included in the chart. Public SaaS companies have vastly outperformed those indexes and I can’t think of any other asset class of this size to have such high returns over the past 15 years.
There have been some outliers— I went and looked at the individual performance of the companies in this group that had share price returns of ~10x+ from their IPO price — it includes six companies; Shopify, ServiceNow, Paycom, Salesforce, Zendesk, and Twilio. As you can see in the table below, these companies have demonstrated incredible returns and revenue growth rates for sustained periods of time. For example, Salesforce has grown revenue at almost a 40% CAGR for 15+ years. Shopify, the company with the greatest share price return from IPO price, has been growing at a 72% CAGR. Revenue growth has been the largest factor in returns for these businesses.
Taking a deeper look into their respective market caps over time, the below chart has indexed market cap from the first day of trading. Each one of these six companies closed their first day of trading ~$1–3B in market cap and have continued to grow. Salesforce, which has been trading for 15 years is now at ~$120B in market cap. Interestingly, the other five companies are accruing value faster than Salesforce did in their earlier years. It’s not totally fair since Salesforce was trading during the Great Recession (the others came after), but an interesting visual. The month and year each company started trading are in parentheses.
On the indexed stock price returns for these same six companies, all of them are also accruing returns faster than Salesforce did. Salesforce has grown their stock price ~3,500% since their first day’s close of $4.30 in June of 2004, and the more recent public companies in Shopify, ServiceNow, Paycom, Zendesk, and Twilio are growing even faster. The month and year each company started trading are also in parentheses.
Another interesting view of these six companies is looking at their respective share price and NTM revenue multiples over time. I outputted each company’s trading history and plotted share price and NTM revenue multiples for each trading day since they've been public.
Shopify (SHOP)
Shopify’s stock price is up 18.9x since IPO and their multiple has been climbing steadily, and more recently the relationship between their multiple and stock price has been more closely related. They are growing revenue the fastest out of the six companies.
ServiceNow (NOW)
On the other hand, ServiceNow was actually trading at a higher multiple in 2012 than they are today. Their stock price is up 16.6x since IPO. More recently, and similar to Shopify, their multiple and stock price have been more tightly coupled.
Paycom (PAYC)
Paycom’s stock is up 16.0x since IPO and they have grown both their multiple and stock price steadily since they went public in 2014.
Salesforce (CRM)
Salesforce, the longest-trading and up 14.0x from their IPO price, has had a more consistent NTM revenue multiple. They dipped significantly in 2008/2009 but have not reached the 15–20x+ NTM revenue multiple levels of some of the other companies.
Zendesk (ZEN)
Zendesk’s stock price is up 10.4x from their IPO price and similar to ServiceNow, previously traded at a higher multiple than they are at today.
Twilio (TWLO)
Twilio is also similar. Their stock price is up 9.7x from IPO price and was previously trading close to 20x NTM revenue shortly after their IPO and now is ~15x. Their stock price continues to rise ahead of their multiple more recently.
The overall returns from public SaaS companies have been remarkable — the average SaaS company has returned almost 5x from their IPO price. For context, most venture capital funds strive to return 3x+ funds over a 10-year fund lifecycle, whereas if you had a dollar in every SaaS IPO you’d be up 4.7x as of 9-July-2019, on an average timeframe of fewer than 4 years. The past 10 years in particular has been an exceptional time for public SaaS companies in many regards, and we’re now above the 2014 NTM revenue multiple highs — on average investors are paying higher multiples today for SaaS companies than at any other time in public SaaS trading history. At the same time, there are companies like Zoom that are growing revenue 100%+ YoY while profitable, at almost $500M in run-rate revenue. No one knows what will happen at the macroeconomic level over the next few months and years (the current bull market has to slow down at some point), but it’s never been a better time to be a high-growth public SaaS company (or investor!). For those companies that do get public, their investors and employees are being rewarded handsomely and it’s clear that going public isn’t the end goal, but just the beginning.
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