SEG’s 2Q20 SaaS Public Market Update highlighted a general flight to quality among investors in the face of an uncertain and evolving macro environment.
A clear illustration of this is shown on slide 17 of our report. Here, we show the distribution of EV/Revenue multiples across various ranges. The percent of total SaaS companies dropping below 5x EV/Revenue multiples jumped roughly 50% YOY to 28.4% from 19.8%. Meanwhile, the percent of SaaS companies trading at EV/Revenue multiples of 15x and above jumped over 10% YOY to 29.5% from 26.4%.
Looking under the hood at the respective cohorts, it’s clear that investors were seeking companies with stronger overall financial performance. Of the companies that dropped into the 5x and below multiple range from the prior year, they had a meager Rule of 40 ratio of 4.7%, generating an average of 19.5% TTM revenue growth and a -14.7% EBITDA margin. Nearly half of these companies had a Rule of 40 ratio of 0% or less. An example is Domo. The company’s EV/Revenue multiple plunged by 50% YOY. In addition, its Rule of 40 ratio was -34%, dragged down by -54% EBITDA margins.
Conversely, SaaS companies that jumped into the 15x or higher multiple range from the prior year had an average Rule of 40 ratio of 38.1%. These companies generated an average of 29.1% TTM revenue growth and 8.9% EBITDA margins. An example is Kinaxis, which possessed a strong overall financial performance of 26% TTM revenue growth with 22% EBITDA margins. The company saw its EV/Revenue multiples jump nearly 100% YOY from 8.4x in 2Q19 to 15.3x in 2Q20.
Read SEG’s 2Q20 SaaS Public Market Update for more coverage on the 90+ companies in the SEG SaaS Index.