Cloud and SaaS received premium valuation from 2020 to 2021.
The outperformance started in 2016 and lasted 5-6 years. Watch that outperformance here: https://cloudindex.bvp.com/
Back then, “rule of 40” is the king of valuation metrics, which means “um of revenue growth and profit margin should equal 40%+”. The higher the better of course.
While market fluctuates, you can find the P/S or revenue multiple in the past.
Here, you see that in 2016 companies at rule of 40 receives ~6-7x current year revenue multiple.
Here, you see that in 2020 companies at rule of 40 receives 17x LTM revenue, or 12.8x forward revenue.
During this 2020-21 period, it’s normal to see 30-40x P/S for hot SaaS companies. I remembered Shopify was 40x P/S.
Looks at these charts from here – the evidence of 30-40x P/S glory days.
We all know what happened next.
That multiple fell back to ~6x for the regression line in 2022, with Fed raising interest rates. See here for the chart.
The multiple has stabilized afterwards, from 2022 till now.
Currently, the valuation (forward revenue multiple) is ~4-5x for 2nd and 3rd quantile companies followed by BVP, including the names like Salesforce, Hubspot, Workday, Nutanix, etc.
BVP has introduced the new the Rule of X to give growth more credit btw.
I think some bubble is brewing now, with AI model companies or even chip companies.
However, investors keeps dancing, expecting that Trump will appoint new Fed Chair this year and the new chair won’t raise rates. Trump wants lower rates, not higher.
Maybe we should see another around of crazy valuation first.
And if SaaS outperformed 5-6 years (2016-2021), maybe AI-related stuff should outperform till 2027/28.