CRM: a case study for SaaS companies

Salesforce.com (hereafter referred to as ticker CRM) is the first and only pure play Cloud company that has remained public (not acquired and not failed) for an extended period AND has matured into a Mega Cap company. Examining CRM’s long history may be useful not only for providing some insights and perspective for younger, public SaaS companies without long histories as public companies but also to foresee how much these smaller companies may one day be worth should they become dominant juggernauts. The current crop of SaaS companies currently valued in the range of $5-10B do not have long histories as public companies (usually less than 5 years) and during this period, the valuations of these companies have skyrocketed at rates above their revenue growth rates causing their valuation multiples to expand. Was this valuation expansion justified or was it a temporary “bubble”? This is not a question that I believe can be answered and the answer may be different from company to company. Time will tell. But I do hope to gain some perspective by looking at CRM as we will get a view of the company from the time it was a hypergrowth $50M revenue firm to how it is today as a $15B revenue, cash generating machine….and the 15+ years (around 60 quarters) in between. If the SaaS companies that we own now are star high school basketball players, we have the benefit of the complete record of Michael Jordan from elementary school, through high school and college, and on to becoming one of the most successful NBA stars. In this respect, CRM is really one of a kind. I originally wanted to examine several mature companies, but CRM is really one of a kind. It also took a long of time and effort to pull and enter 70+ quarters of data. Therefore, I think this will be more of a case study (with an N of one).

What is CRM?
CRM is a company that provides a customer relationship management system that enables companies to manage the relationships between their salesforces and their customers. CRM delivers their CRM solution through the Cloud and charges their customers on a recurring subscription basis. CRM was founded in 1999 and had their IPO on June 23, 2004. The company was valued at about $1.2B at its IPO and has grown to a $115B valuation today (October 21, 2019). The share price peaked at the end of April 2019 and is currently about 14% below that level (notice this is decline from the peak is much less than the decline in valuation of the smaller SaaS companies).

CRM’s Success
CRM really is an amazing success story. The shares went public at $11 ($2.75 split adjusted) on June 23, 2004. The trading range on the open market on the day of the IPO was between $3.69 and $4.33 (split adjusted). The return since then using today’s price of $144.55 is 3138% or 31x from the highest price on the opening day of trading; this amounts to a CAGR of 25.7%. Clearly, this is one of those homerun investments. If you could have bought during the 2008/2009 financial crisis the CAGR would have been much, much higher.

CRM’s Financials
I extracted several financial datapoints from each earnings press release (and from the S-1 for data prior to the IPO). For those of you who have not accessed data before, all the 10-Qs (quarterly reports) and 10-K (annual reports) are archived at the SEC’s web portal (SEC Edgar). I used the actual press releases (filed as 8-K), and to get the old ones that are no longer available at CRM’s investor relations page, you can find them at SEC Edgar. There are many 8-Ks as there are company press releases for announcements other than earnings releases; the 8-K for the earnings announcement press releases are usually easily identifiable because they are issued 1 or several days prior to the filling of the related 10-Q/10-K. So usually the 8-K that you want is the once immediately preceding the 10-Q/10-K.

As you will see below, CRM’s financials are pretty incredible by most measures. Before I post the data, I’d like to go over what data I extracted and why:

Revenue
Revenue, comprised of Subscription Revenue and Professional Services Revenue, is one of the most important metrics. This is because revenue is harder to manipulate than earnings so it gives us a good read on how the business is growing. We should all be familiar with these as we have been diligently tracking revenue for the SaaS stocks that we own. For CRM, subscription revenue was initially around 10-12% of total revenue until its annual revenue was around $1B. As a larger company, CRM’s subscription revenue was about 94% of the total revenue. This is very similar to many of our smaller SaaS companies. The Gross Margins on subscription revenue (spot checked GAAP FY2004, FY2006, and FY2008) were 91%, 87%, and 87% on total FY subscription revenue of $86M, $280M, and $680M respectively. I chose to look at these times in the history because the subscription revenues are in a similar range of subscription revenues to those of our smaller SaaS companies today. They look very comparable to me. The professional services revenue had negative margin during these years: FY2004: GAAP cost of $9.5M on $10.2M revenue, FY2006: GAAP cost of $35M on $29M of revenue, and FY2008: GAAP cost of $80M on $68M revenue. These professional services GMs are also in the ballpark when compared to our SaaS companies.
From the revenue numbers I calculated the year over year growth rates for total revenue and subscription revenue. I also calculated the TTM revenue growth rates.
Note: on 2/1/2018 CRM adopted the ASC606 accounting standard. The impact on revenue was not that big so I didn’t make any adjustments (i.e. entered ASC 606 for the 4/30/18 quarter and more recent quarters).

Earnings Release Date
I tracked the earnings release date for each release so that I can track the stock price starting the day after the announcement through the day of the next announcement.

Earnings release performance compared to guidance
I noted each time that CRM beat their revenue guidance and whether they raised their previous guidance. I was very surprised to see that CRM beat their revenue guidance in 59 of 60 quarters (98.3%)!!! I have to wonder if any company ever has ever beat guidance so consistently. In addition, their beats averaged only 2.1% over the top end of guidance with their biggest beat only being 7.0%. CRM sure had consistency and predictability, something that Wall Street really loves. Note: the one time they did not beat guidance was in Q1 2009 (in the dark depths of the financial crisis), and that miss was only by about $75K of $305M (miss of 0.025%…a little rounding error which is really a meet guidance rather than a guidance miss!). CRM only lowered previous guidance 2 times (also in 2009) but then they went on to beat this lowered guidance both times. CRM raised previous revenue guidance 58/60 times (these were all beat and raise quarters!!). Has there ever in history been a company growing at a high revenue growth rate that beat and raised every single time except twice during the worst financial crisis in history since the Great Depression? Absolutely amazing performance, consistency, and predictability! Wow!

Cash, Debt, and Deferred Revenue
I tracked cash, long term debt, and deferred revenue. Cash (subtracted from market cap) and debt (added to market cap) were used to adjust the market cap to arrive at Enterprise Value. There were acquisitions made by CRM along the way; I did not make any adjustments and the acquisitions were just embedded in the numbers that I used for this analysis. I also tracked deferred revenue but I haven’t really used these numbers for any additional calculations. For the 4/30/2018 quarter and more recent quarters, I entered Unearned Revenue instead of Deferred Revenue; the company began reporting this metric instead of Deferred Revenue; the differences were small so I did not try to make any adjustments. I will say that CRM’s deferred revenue has grown to a massive amount (more than $7B); in addition, RPO (Remaining Performance Obligation) has grown to more than $25B.

CFFO and FCF
I tracked Cash Flow from Operations and Capital Expenditures each quarter. From those figures I calculated Free Cash Flow (FCF) and TTM FCF. Since FCF varies widely from one quarter to the next, I think it is better to look at TTM FCF. As CRM’s growth rate slowed to the 20-35% range, I think that looking at EV/TTM FCF may be another metric to track; this valuation multiple may be more reliable than EV/TTM Sales for a mature company. Since our smaller SaaS companies may someday become mature juggernauts (hopefully), we can “forecast” what they might one day be worth on a EV/TTM FCF basis (and assigning a multiple on that ratio).

Outstanding Shares
I tracked the outstanding share count each quarter. I used the fully diluted values. The share counts were used to calculate market cap values which were used to calculated EV. Note: CRM has a 4:1 stock split in 2013. I accounted for this my multiplying the share count by 4 for the periods prior to the stock split.

Stock Price ranges
I downloaded (from Yahoo! Finance) the daily stock price history from 6/23/04 (IPO) through 10/18/19 (current). It only took about 10 seconds to get the daily stock prices for the entire 15 year period! Using the closing price each day, I noted the high and low price during each quarter to arrive at a range. I used the day following each earnings release date at the beginning date for each period and the day of the following earnings release date as the end date for each period. I used the day after the earnings release because earnings were reported after market close on the day of the release. CRM had a 4:1 stock split on 4/18/13. The downloaded share prices are split adjusted so I adjusted (multiplied by 4) the Outstanding Shares for all quarters prior to the share split date.

EV/TTM Sales ranges
I calculated the EV/Sales range for each period.

Here’s the data in tabular form. I did not show all of the data, and focused on the data that I thought is most relevant. There are lots of columns so you will need to click the “FORMAT FOR PRINTING” button so see all the columns.


Q end	Sub	PS	Rev 	TTM Rev	%Beat	RevGr	SubGr	TTMGr	DefRev	Cash	Debt	FCF	FCFTTM	PriceHi	PriceLo	EV/RLo	EV/RHi	EV/FCFL	EV/FCFH	FedLo	FedHi	Start	End
Apr-02	8.8	0.5	9.4																				
Jul-02	11.3	0.6	11.9																				
Oct-02	12.9	1.3	14.2																				
Jan-03	14.6	0.9	15.6	51				127.5%															
Apr-03	16.9	2	18.9	60.6		102.3%	92.1%																
Jul-03	19.6	2	21.6	70.3		82.0%	73.8%					3.5											
Oct-03	22.5	3	25.4	81.5		79.2%	73.8%			30		6.2											
Jan-04	26.8	3.3	30.1	96		93.1%	83.1%	88.3%	50	36		4.8											
Apr-04	31.1	3.7	34.8	112		84.2%	83.9%	84.9%		44		6.4	21	2.4	4.3					1.00%	1.50%	6/23	8/19
Jul-04	36	4.6	40.6	131		87.7%	83.8%	86.2%		173	0	14	32	3.13	5.49	9	16.8	37	69	1.50%	2.00%	8/20	11/17
Oct-04	41.5	4.9	46.4	152	3.0%	82.3%	84.5%	86.2%	74	185	0	12	38	3.27	4.5	8.8	12.6	35.6	50.9	2.00%	2.50%	11/18	2/17
Jan-05	49.4	5.2	54.6	176	4.5%	81.7%	84.2%	83.7%	96	206	0	15	48	3.5	4.23	8.1	10	30	37.1	2.50%	3.00%	2/18	5/18
Apr-05	58.2	6	64.2	206	7.0%	84.2%	87.0%	83.8%	105	217	0	9	50	4.43	6.13	9	12.8	36.8	52.7	3.00%	3.50%	5/19	8/17
Jul-05	65.6	6.3	71.9	237	2.8%	77.3%	82.2%	81.1%	117	233	0	11	46	4.78	7.09	8.5	13.1	43.6	67.3	3.50%	4.00%	8/18	11/16
Oct-05	74.4	8.3	82.7	273	3.3%	78.3%	79.4%	80.1%	127	257	0	19	54	7.19	10.66	11.5	17.6	58.7	89.4	4.00%	4.50%	11/17	2/22
Jan-06	82.4	8.6	91.1	310	1.2%	66.8%	66.9%	75.7%	169	297	0	34	73	7.54	9.95	10.8	14.6	46.3	62.3	4.50%	5.00%	2/23	5/17
Apr-06	94	10	105	350	3.6%	63.1%	62.4%	70.3%	182	298	0	10	74	5.46	7.76	6.6	9.8	31.6	46.6	5.00%	5.25%	5/18	8/16
Jul-06	107	11	118	397	3.6%	64.2%	62.5%	67.3%	203	334	0	27	90	8.21	11	9	12.3	39.6	54.4	5.25%	5.25%	8/17	11/15
Oct-06	118	12	130	444	1.6%	57.3%	59.2%	62.4%	219	371	0	22	92	9.01	12.47	8.9	12.7	43	61	5.25%	5.25%	11/16	2/21
Jan-07	132	12	144	497	1.6%	58.4%	60.2%	60.4%	284	413	0	31	89	10.27	11.86	9.2	10.7	51.3	59.9	5.25%	5.25%	2/22	5/16
Apr-07	148	15	162	555	3.4%	55.1%	56.3%	58.4%	296	448	0	21	100	9.72	12.18	7.6	9.8	42.3	54.2	5.25%	5.25%	5/17	8/15
Jul-07	160	17	177	613	2.1%	49.5%	50.0%	54.6%	322	497	0	25	98	9.86	14.27	7	10.5	44	65.9	4.50%	5.25%	8/16	11/15
Oct-07	176	16	193	676	2.0%	48.2%	48.9%	52.3%	341	571	0	43	119	11.97	16.25	7.8	10.9	44.4	62	3.00%	4.50%	11/16	2/27
Jan-08	197	20	217	749	4.3%	50.4%	48.8%	50.6%	481	670	0	72	161	13.88	17.54	8.3	10.7	38.5	49.8	2.00%	3.00%	2/28	5/21
Apr-08	225	22	248	834	5.4%	52.5%	52.6%	50.3%	470	751	0	60	200	15.59	18.61	8.4	10.2	35.1	42.7	2.00%	2.00%	5/22	8/20
Jul-08	240	23	263	920	1.6%	49.0%	49.8%	50.1%	480	823	0	40	215	5.49	14.5	2.1	7	9	30.1	1.00%	2.00%	8/21	11/20
Oct-08	253	23	276	1004	0.9%	43.4%	43.7%	48.5%	470	805	0	6	178	5.58	8.71	2	3.5	11.2	20	0.25%	1.00%	11/21	2/25
Jan-09	266	23	290	1077	1.6%	33.5%	35.4%	43.8%	594	883	0	63	169	6.83	11.23	2.3	4.4	15	27.9	0.25%	0.25%	2/26	5/21
Apr-09	282	23	305	1134	0.0%	23.1%	25.0%	36.0%	549	984	0	85	193	8.89	12.03	3.1	4.5	18	26.1	0.25%	0.25%	5/22	8/20
Jul-09	293	23	316	1187	1.0%	20.1%	22.4%	29.0%	549	1030	0	27	180	12.79	16.71	4.6	6.3	30.3	41.3	0.25%	0.25%	8/21	11/17
Oct-09	307	24	331	1241	2.0%	19.6%	21.1%	23.6%	545	1070	0	21	196	15.52	18.71	5.6	6.9	35.3	43.7	0.25%	0.25%	11/18	2/24
Jan-10	327	26	353	1305	3.2%	21.9%	23.0%	21.2%	704	1727	450	85	217	16.99	22.17	5.8	7.9	35	47.5	0.25%	0.25%	2/25	5/20
Apr-10	351	26	377	1376	2.7%	23.6%	24.5%	21.4%	665	1902	456	131	264	20.53	26.01	6.8	8.9	35.7	46.7	0.25%	0.25%	5/21	8/19
Jul-10	369	25	394	1455	3.0%	24.8%	25.7%	22.6%	683	1859	461	48	285	24.98	30.79	8.3	10.4	42.1	53	0.25%	0.25%	8/20	11/18
Oct-10	403	26	429	1553	4.7%	29.8%	31.3%	25.2%	695	1802	467	53	317	30.99	37.65	10.1	12.4	49.4	60.9	0.25%	0.25%	11/19	2/24
Jan-11	429	28	457	1657	1.8%	29.4%	30.9%	27.0%	935	1408	473	135	368	30	35.52	9.6	11.5	43.2	51.6	0.25%	0.25%	2/25	5/19
Apr-11	474	31	504	1785	4.6%	33.8%	35.0%	29.7%	915	1522	478	112	349	28.51	39.83	8.4	12	43.1	61.4	0.25%	0.25%	5/20	8/18
Jul-11	509	37	546	1936	3.4%	38.4%	38.0%	33.1%	935	1287	484	38	339	27.72	34.79	7.8	9.9	44.6	56.6	0.25%	0.25%	8/19	11/17
Oct-11	549	35	584	2091	2.5%	36.2%	36.3%	34.6%	918	1297	490	94	379	24.37	33.06	6.2	8.6	34.4	47.4	0.25%	0.25%	11/18	2/23
Jan-12	594	38	632	2267	1.3%	38.3%	38.7%	36.8%	1380	1447	496	196	440	33.45	39.89	8	9.6	41	49.3	0.25%	0.25%	2/24	5/17
Apr-12	655	40	695	2458	2.6%	37.9%	38.4%	37.7%	1335	1657	502	168	496	30.34	37.65	6.7	8.5	33.4	42	0.25%	0.25%	5/18	8/23
Jul-12	687	44	732	2643	0.5%	34.0%	35.0%	36.5%	1337	1804	509	107	565	34.92	39.86	7.2	8.3	33.8	38.9	0.25%	0.25%	8/24	11/20
Oct-12	741	48	788	2847	1.5%	34.9%	34.9%	36.1%	1292	1416	515	55	526	39.09	44.52	7.9	9.1	42.9	49.1	0.25%	0.25%	11/21	2/28
Jan-13	785	49	835	3050	0.6%	32.1%	32.2%	34.6%	1863	1758	521	231	561	40.32	47.01	7.7	9	41.8	49.1	0.25%	0.25%	3/1	5/23
Apr-13	842	50	893	3247	0.6%	28.4%	28.5%	32.1%	1733	3079	1725	229	622	36.75	45.69	6.6	8.3	34.6	43.6	0.25%	0.25%	5/24	8/29
Jul-13	903	54	957	3473	2.3%	30.8%	31.3%	31.4%	1790	930	2025	81	596	48.47	57.31	9	10.6	52.7	61.9	0.25%	0.25%	8/30	11/18
Oct-13	1004	72	1076	3760	2.0%	36.5%	35.6%	32.1%	1735	1085	2017	65	606	50.98	66.22	8.9	11.5	55.4	71.5	0.25%	0.25%	11/19	2/27
Jan-14	1075	70	1145	4071	1.4%	37.2%	36.9%	33.5%	2522	1321	2004	201	576	49.13	63.68	8	10.3	56.6	73	0.25%	0.25%	2/28	5/20
Apr-14	1147	79	1227	4405	1.4%	37.4%	36.2%	35.7%	2325	1530	1712	413	760	50.19	59.2	7.4	8.7	43	50.7	0.25%	0.25%	5/21	8/21
Jul-14	1233	86	1319	4767	2.2%	37.8%	36.5%	37.3%	2353	1672	1691	174	854	52.72	64.45	7.2	8.8	40	48.9	0.25%	0.25%	8/22	11/19
Oct-14	1289	95	1384	5074	1.0%	28.6%	28.3%	34.9%	2224	1827	1632	49	838	53.79	63.74	6.9	8.2	42	49.9	0.25%	0.25%	11/20	2/25
Jan-15	1345	99	1445	5374	0.3%	26.1%	25.1%	32.0%	3321	1890	1450	247	883	63.68	74.65	7.6	8.9	46.2	54.2	0.25%	0.25%	2/26	5/20
Apr-15	1405	106	1511	5658	0.4%	23.2%	22.5%	28.4%	3057	1922	1350	660	1130	67.82	75.71	7.9	8.8	39.4	44	0.25%	0.25%	5/21	8/20
Jul-15	1521	113	1635	5974	2.2%	24.0%	23.4%	25.3%	3035	2067	1350	240	1195	65.17	79.41	7.2	8.8	36.1	44.1	0.25%	0.25%	8/21	11/18
Oct-15	1596	116	1712	6302	0.7%	23.7%	23.9%	24.2%	2847	2301	1350	38	1184	54.05	82.14	5.7	8.7	30.1	46.2	0.25%	0.25%	11/19	2/24
Jan-16	1683	127	1809	6667	1.0%	25.3%	25.1%	24.1%	4292	2725	1350	391	1328	67.75	77.87	6.7	7.8	33.8	39	0.25%	0.25%	2/25	5/18
Apr-16	1775	141	1917	7073	1.1%	26.8%	26.3%	25.0%	4007	3715	1350	968	1636	76.07	83.77	7.1	7.8	30.5	33.7	0.25%	0.25%	5/19	8/31
Jul-16	1886	151	2037	7475	1.1%	24.6%	24.0%	25.1%	3824	1720	1850	155	1551	68.42	76.55	6.4	7.1	30.8	34.4	0.25%	0.25%	9/1	11/17
Oct-16	1984	161	2145	7907	6.6%	25.3%	24.3%	25.5%	3495	1751	1850	14	1527	68.41	82.18	6.1	7.3	31.6	38	0.25%	0.75%	11/18	2/28
Jan-17	2111	183	2294	8392	0.7%	26.8%	25.4%	25.9%	5543	2209	2050	562	1698	81.52	89.8	6.9	7.6	34	37.5	0.75%	1.00%	3/1	5/18
Apr-17	2201	187	2388	8863	1.6%	24.6%	24.0%	25.3%	5043	3220	1850	1073	1804	86	92.95	6.8	7.4	33.6	36.4	1.00%	1.25%	5/19	8/22
Jul-17	2368	193	2562	9388	1.7%	25.8%	25.6%	25.6%	4819	3501	1850	203	1852	92.34	108.8	7	8.3	35.5	42	1.25%	1.25%	8/23	11/21
Oct-17	2486	194	2680	9923	1.1%	24.9%	25.3%	25.5%	4392	3529	1850	15	1853	99.85	116.65	7.3	8.5	38.9	45.6	1.25%	1.50%	11/22	2/28
Jan-18	2655	196	2851	10480	1.4%	24.3%	25.8%	24.9%	7095	4522	1727	914	2204	112.88	130.63	7.8	9.1	37.1	43.2	1.50%	1.75%	3/1	5/29
Apr-18	2810	196	3006	11098	2.4%	25.9%	27.7%	25.2%	6201	7159	3200	1344	2475	129.3	154.8	8.4	10.2	37.8	45.6	1.75%	2.00%	5/30	8/29
Jul-18	3060	221	3281	11818	1.6%	28.1%	29.2%	25.9%	5883	3427	3700	288	2560	120.67	160.43	7.9	10.5	36.6	48.6	2.00%	2.25%	8/30	11/27
Oct-18	3168	224	3392	12530	0.8%	26.6%	27.4%	26.3%	5376	3450	3699	7	2553	121.33	164.53	7.6	10.3	37.4	50.7	2.25%	2.50%	11/28	3/4
Jan-19	3375	228	3603	13282	1.2%	26.4%	27.1%	26.7%	8564	4342	3198	1164	2803	145.1	166.95	8.5	9.8	40.3	46.4	2.50%	2.50%	3/5	6/4
Apr-19	3496	241	3737	14013	1.5%	24.3%	24.4%	26.3%	7585	6379	3197	1806	3265	139.72	161.27	7.7	8.9	33	38.2	2.25%	2.50%	6/5	8/22
Jul-19	3745	252	3997	14729	1.2%	21.8%	22.4%	24.6%	7142	6042	2996	258	3235									8/23	

The headings are as follows:

  • Date (month-year) : closing date of each quarter
  • Sub: Subscription Revenue
  • PS: Professional Services Revenue
  • Rev: Total Revenue
  • TTM Rev: Trailing 12 Months Revenue
  • %Beat: Percentage Beat over the most recent (1 quarter prior) top end of range guidance
  • RevGr: Year over year total revenue growth
  • SubGr: Year over year subscription revenue growth
  • TTMGr: Full year over prior full year total revenue growth
  • Cash: Cash and cash equivalents
  • Debt: long term debt
  • FCF: Free Cash Flow (CFFO less CapEx as stated in the State of Cashflows)
  • TTMFCF: Trailing 12 Months FCF
  • PriceHi: Highest closing stock price during the period
  • PriceLo: Lowest closing stock price during the period
  • EV/RLo: Lowest EV/TTM Sales during the period
  • EV/RHi: Highest EV/TTM Sales during the period
  • EV/FCFL: Lowest EV/TTM FCF during the period
  • EV/FCFH: Highest EV/TTM FCF during the period
  • FedLo: Lowest Fed Funds interest rate during the period
  • FedHi: Highest Fed Funds interest rate during the period
  • Start: First day of the period
  • End: Last day of the period

Discussion and Analysis

CRM definitely qualifies as a company that is comparable to our SaaS companies.

Revenue Growth
Let’s start with growth. CRM started as a hyper growth company. It was growing revenue very fast prior to the IPO (data not in the above table):


FY         Rev (M)    Growth
2001    $   5.4
2002    $22.4         315%
2003    $51.0         128%
2004    $96.0           88%

After the IPO when CRM was about a $150M revenue company (half the size of our typical SaaS company), the revenue growth was in the high 80s. This lasted for about a year, followed by 18 months in the 60-70s, followed by 2 years in the 50s, six months in the 40s. It then rapidly dropped to the 20s and stayed there for 2 years before reaccelerating to the mid 30s for 2 years. Finally, it settled to about 25% growth and has been there for the past 4 ½ years. In looking at this history, the obvious question that comes to mind is how long can we expect our $300M-ish companies to remain in hyper growth mode? When will their growth rate slow down?

Gross Margins
As I wrote above, CRM had GMs on subscription revenue of 91%, 87%, and 87% in FYs 2004, 2006, and 2008. I just checked their 7/31/2019 quarter and their GM (on subscription revenue) is still 81% (more than a decade later). These are GAAP GM so their non-GAAP (excluding share based compensation) will be even higher. Based on CRM being able to maintain pricing power over a 20 year period shows that there is little pricing pressure due to competition. This is very encouraging as it demonstrates that it is possible for a SaaS company to deliver a service and as long as that service keeps customers happy they will stick with you. Is this due to the SaaS model or is it due to CRM continually adding new features and improvements to keep the customers happy? Or both? Or is the switching cost just too high so customers don’t switch? Whatever the answer(s), we can see that a SaaS company can avoid disruption over an extended period. High growth and high margins, while they are said to attract competitors, did not lead to a dampening of CRMs business. Which of our SaaS companies will also be impervious to competitive pressures?

Of our companies, only AYX (91%) has higher margins than CRM. OKTA (83%), ZM (82%), ZS (81%), SMAR (81%), ESTC (80%), CRWD (76%), MDB (75%), DDOG (75%), TWLO (55%) all have lower margins than CRM did in its hyper growth period. The GM of a company is really important because it sets a limit on how much net margin and FCF margin a company can earn. Ultimately a company will be valued based on its ability to generate free cash flow; high GM business have a big advantage and higher GM businesses (all else being equal) should be valued higher than lower GM businesses. Aside from AYX, CRM was better on a GM basis than all our other SaaS companies.

Free Cash Flow
Ultimately, a company will be valued on FCF and FCF growth. Many of our SaaS are FCF negative and people have said that they want the company to invest everything the make back into growth so it’s ok. But don’t we want to see the company making progress toward profitability? I think so, and I give higher allocation to companies that are FCF positive or at least improving quarter to quarter. CRM, at the time it went IPO in 2004, is really quite different from the similarly sized SaaS companies of today. As a $110M TTM Revenue company, CRM generated $23.6M in FCF!!! This is 23.3% of revenue with a revenue growth rate of 85%! Our best SaaS (or Saas-like in AYX’s case) companies in this regard are AYX and ZS (but now growing the 50s and not the 80s!). And CRM then was about 1/3 of the size of AYX and ZS!! ZS’s TTM revenue is $302M and its FCF is $29.3M so 9.7% of TTM revenue. AYX’s TTM revenue is $310M and its FCF is $19.6M so 6.3% of TTM revenue. And these are the best. ESTC had negative $35.5M FCF on $305M TTM revenue. MDB had negative $33.4M FCF on $346M TTM revenue. OKTA had $12.9M FCF on $487M TTM revenue so 2.6%. In Q4 FY 2006 CRM had $310M TTM revenue and $72.5M TTM FCF so 23.4%. In the most recent quarter, CRM had $14.7B in TTM revenue and $3.2B in TTM FCF so 21.7%. So all along since CRM was public as a $110M hyper growth company all the way through to today, CRM has been printing cash at a rate greater than 20% of revenue (well, there were some quarter as low as 16%). So somehow CRM managed hyper growth while ALSO generating cash. Why can’t our SaaS companies BOTH grow fast AND generate cash? Some are starting to but for those that aren’t yet, will they ever? This is a major criterion for me when I choose my allocations. This is a very important reason why AYX and ZS are big positions and ESTC isn’t.

Valuation and Valuation Ranges


Date	TTMRev	Growth	RatioL	RatioL	RateL	RateH
Apr-03	60.6	102.30%				
Jul-03	70.3	82.00%				
Oct-03	81.5	79.20%				
Jan-04	96	93.10%				
Apr-04	112	84.20%	IPO	IPO	1.00%	1.50%
Jul-04	131	87.70%	9	16.8	1.50%	2.00%
Oct-04	152	82.30%	8.8	12.6	2.00%	2.50%
Jan-05	176	81.70%	8.1	10	2.50%	3.00%
Apr-05	206	84.20%	9	12.8	3.00%	3.50%
Jul-05	237	77.30%	8.5	13.1	3.50%	4.00%
Oct-05	273	78.30%	11.5	17.6	4.00%	4.50%
Jan-06	310	66.80%	10.8	14.6	4.50%	5.00%
Apr-06	350	63.10%	6.6	9.8	5.00%	5.25%
Jul-06	397	64.20%	9	12.3	5.25%	5.25%
Oct-06	444	57.30%	8.9	12.7	5.25%	5.25%
Jan-07	497	58.40%	9.2	10.7	5.25%	5.25%
Apr-07	555	55.10%	7.6	9.8	5.25%	5.25%
Jul-07	613	49.50%	7	10.5	4.50%	5.25%
Oct-07	676	48.20%	7.8	10.9	3.00%	4.50%
Jan-08	749	50.40%	8.3	10.7	2.00%	3.00%
Apr-08	834	52.50%	8.4	10.2	2.00%	2.00%
Jul-08	920	49.00%	2.1	7	1.00%	2.00%
Oct-08	1004	43.40%	2	3.5	0.25%	1.00%

I’ve selected the time period in the above table because it encompasses the period when CRM was growing revenue at rates that we like to see in our SaaS companies. On the low end the EV/TTM revenue ratio was usually around 8 and on the high end the ratio was mostly 12 for a 50%+ grower and around 10 for a 40-50% grower. When I first looked at these figures, I was somewhat surprised that they never ever spiked to levels that we have seen in the recent past for our SaaS. CRM was a better company then than ANY of our current SaaS companies. What does this all mean? Well, I think it provides some historical perspective. Yes, perhaps the multiples awarded a decade ago before it was proven that a SaaS company can become a Mega Cap juggernaut, the market was unwilling to award the high multiples that we have seen recently. Perhaps the multiples back then were lower than they should have been and maybe the range has permanently shifted upward. I would say that’s probably the case. Another difference between today and back then was the interest rate environment. The above table shows the high and low of the Fed Funds rate (short term interest rate). A high and/or rising interest rate environment is less favorable to growth stocks and growth stock valuations because future cash flows are discounted more. So in today’s interest rate environment, the multiples deserve to be a bit higher than during the 2004-2007 period. Nevertheless, the ranges of the past could be retested. Who knows. However, if the underlying businesses perform like CRM did then even the highest multiples of back then are screaming buys. The key it to try to pick the companies that will become the CRM’s of the future.

Let’s look at the EV/TTM FCF multiples.


**Q end	TTMRev	RevGr	TTM/FCF	FCF/Rev	EV/FCFL	EV/FCFH	FedL	FedH**
Apr-02								
Jul-02								
Oct-02								
Jan-03	51							
Apr-03	60.6	102.3%						
Jul-03	70.3	82.0%						
Oct-03	81.5	79.2%						
Jan-04	96	93.1%						
Apr-04	112	84.2%	21	19%			1.00%	1.50%
Jul-04	131	87.7%	32	24%	37	69	1.50%	2.00%
Oct-04	152	82.3%	38	25%	35.6	50.9	2.00%	2.50%
Jan-05	176	81.7%	48	27%	30	37.1	2.50%	3.00%
Apr-05	206	84.2%	50	24%	36.8	52.7	3.00%	3.50%
Jul-05	237	77.3%	46	20%	43.6	67.3	3.50%	4.00%
Oct-05	273	78.3%	54	20%	58.7	89.4	4.00%	4.50%
Jan-06	310	66.8%	73	23%	46.3	62.3	4.50%	5.00%
Apr-06	350	63.1%	74	21%	31.6	46.6	5.00%	5.25%
Jul-06	397	64.2%	90	23%	39.6	54.4	5.25%	5.25%
Oct-06	444	57.3%	92	21%	43	61	5.25%	5.25%
Jan-07	497	58.4%	89	18%	51.3	59.9	5.25%	5.25%
Apr-07	555	55.1%	100	18%	42.3	54.2	5.25%	5.25%
Jul-07	613	49.5%	98	16%	44	65.9	4.50%	5.25%
Oct-07	676	48.2%	119	18%	44.4	62	3.00%	4.50%
Jan-08	749	50.4%	161	21%	38.5	49.8	2.00%	3.00%
Apr-08	834	52.5%	200	24%	35.1	42.7	2.00%	2.00%
Jul-08	920	49.0%	215	23%	9	30.1	1.00%	2.00%
Oct-08	1004	43.4%	178	18%	11.2	20	0.25%	1.00%
Jan-09	1077	33.5%	169	16%	15	27.9	0.25%	0.25%
Apr-09	1134	23.1%	193	17%	18	26.1	0.25%	0.25%
Jul-09	1187	20.1%	180	15%	30.3	41.3	0.25%	0.25%
Oct-09	1241	19.6%	196	16%	35.3	43.7	0.25%	0.25%
Jan-10	1305	21.9%	217	17%	35	47.5	0.25%	0.25%
Apr-10	1376	23.6%	264	19%	35.7	46.7	0.25%	0.25%
Jul-10	1455	24.8%	285	20%	42.1	53	0.25%	0.25%
Oct-10	1553	29.8%	317	20%	49.4	60.9	0.25%	0.25%
Jan-11	1657	29.4%	368	22%	43.2	51.6	0.25%	0.25%
Apr-11	1785	33.8%	349	20%	43.1	61.4	0.25%	0.25%
Jul-11	1936	38.4%	339	17%	44.6	56.6	0.25%	0.25%
Oct-11	2091	36.2%	379	18%	34.4	47.4	0.25%	0.25%
Jan-12	2267	38.3%	440	19%	41	49.3	0.25%	0.25%
Apr-12	2458	37.9%	496	20%	33.4	42	0.25%	0.25%
Jul-12	2643	34.0%	565	21%	33.8	38.9	0.25%	0.25%
Oct-12	2847	34.9%	526	18%	42.9	49.1	0.25%	0.25%
Jan-13	3050	32.1%	561	18%	41.8	49.1	0.25%	0.25%
Apr-13	3247	28.4%	622	19%	34.6	43.6	0.25%	0.25%
Jul-13	3473	30.8%	596	17%	52.7	61.9	0.25%	0.25%
Oct-13	3760	36.5%	606	16%	55.4	71.5	0.25%	0.25%
Jan-14	4071	37.2%	576	14%	56.6	73	0.25%	0.25%
Apr-14	4405	37.4%	760	17%	43	50.7	0.25%	0.25%
Jul-14	4767	37.8%	854	18%	40	48.9	0.25%	0.25%
Oct-14	5074	28.6%	838	17%	42	49.9	0.25%	0.25%
Jan-15	5374	26.1%	883	16%	46.2	54.2	0.25%	0.25%
Apr-15	5658	23.2%	1130	20%	39.4	44	0.25%	0.25%
Jul-15	5974	24.0%	1195	20%	36.1	44.1	0.25%	0.25%
Oct-15	6302	23.7%	1184	19%	30.1	46.2	0.25%	0.25%
Jan-16	6667	25.3%	1328	20%	33.8	39	0.25%	0.25%
Apr-16	7073	26.8%	1636	23%	30.5	33.7	0.25%	0.25%
Jul-16	7475	24.6%	1551	21%	30.8	34.4	0.25%	0.25%
Oct-16	7907	25.3%	1527	19%	31.6	38	0.25%	0.75%
Jan-17	8392	26.8%	1698	20%	34	37.5	0.75%	1.00%
Apr-17	8863	24.6%	1804	20%	33.6	36.4	1.00%	1.25%
Jul-17	9388	25.8%	1852	20%	35.5	42	1.25%	1.25%
Oct-17	9923	24.9%	1853	19%	38.9	45.6	1.25%	1.50%
Jan-18	10480	24.3%	2204	21%	37.1	43.2	1.50%	1.75%
Apr-18	11098	25.9%	2475	22%	37.8	45.6	1.75%	2.00%
Jul-18	11818	28.1%	2560	22%	36.6	48.6	2.00%	2.25%
Oct-18	12530	26.6%	2553	20%	37.4	50.7	2.25%	2.50%
Jan-19	13282	26.4%	2803	21%	40.3	46.4	2.50%	2.50%
Apr-19	14013	24.3%	3265	23%	33	38.2	2.25%	2.50%

CRM consistently delivered FCF of around 20% of revenue. One can value the company on a multiple of FCF. However, faster growing FCF should be more valuable than slower growing FCF, particularly when the percentage FCF of revenue is remaining constant. As a 50%+ grower, CRM was often trading in the range of 40-60 (with 30 the low and 89 the high) multiple of TTM FCF. As a mature 25% grower, CRM most often traded in a FCF/Revenue ratio range between 35-45 (but as low as 30 and as high as 54).

Let’s take AYX as an example since they have offered investors a guide to their long term FCF margin. They said that they expect to generate between 30-35% FCF margin. See slide 22 of their latest investor presentation. That would be really incredible if they manage that, and it would certainly be the best of all of our companies. It could be this high because the GMs are >90% and there is no zero/low margin professional services revenue dragging things down. By comparison CRM has FCF margins of about 20% and the market assigned the following multiples to CRM (to recap):

50% grower, 16-21% FCF margin: 45-60 multiple
25% grower, 19-23% FCF margin: 30-51 multiple

Recall that CRM’s business performance has been HIGHLY consistent and predictable with 59/60 revenue beats and the beats only averaging about 2%. Management sure has had a great handle on their business. SaaS model recurring revenue will make things more predictable. The markets reward such consistency and predictability.

Assuming that AYX attains its FCF margin in 5 years and averages growth of 50% but slows to 40% at the end of that time period, AYX would have the following TTM revenue (starting with $310M now): $2.35B x 0.35 = $824 FCF. Now a 40% grower deserves a higher multiple than a 25% grower so let’s assign a FCF multiple range of 45 to 70 and assume a 6% per year share dilution. On the low side, we get a $37B market cap, and, on the high side, we get a $57.7B market cap. The share count after a 6%/year dilution is 91.7M shares so the price per share range is $403 (low) and $629 (high) representing a CAGR between 34% and 47% over the 5 year period. That seems pretty incredible, but it would be in line with CRM’s valuation range assuming that AYX delivers on its projections and our predictions and assuming that the market (correctly) awards a higher multiple to a faster grower.

Now we can run similar scenarios for all of our companies. But for those companies like ESTC and MDB which are not yet FCF positive and not even moving toward that it becomes more difficult (with more assumptions) to get to mega cap juggernaut status.

I hope that this analysis has been helpful. I am hoping that it will generate some good discussion.

Chris

PS: I started adding back some leverage for the past 3 days. Added 2022 leaps to my already large AYX and ZS positions. Even if the stocks were to drop another 20% from here I believe that this drop would be temporary and in the long run as others have said even today’s prices will likely be bargains in the long run.

93 Likes

Bloody impressive Chris. Many thx.

4 Likes

Assuming that AYX attains its FCF margin in 5 years and averages growth of 50% but slows to 40% at the end of that time period, AYX would have the following TTM revenue (starting with $310M now): $2.35B x 0.35 = $824 FCF. Now a 40% grower deserves a higher multiple than a 25% grower so let’s assign a FCF multiple range of 45 to 70 and assume a 6% per year share dilution. On the low side, we get a $37B market cap, and, on the high side, we get a $57.7B market cap. The share count after a 6%/year dilution is 91.7M shares so the price per share range is $403 (low) and $629 (high) representing a CAGR between 34% and 47% over the 5 year period.

Summarizing the assumptions.

  • Company grows sales at 50% per year (off a $300M Base) for 5 years
  • Company maintains current margins along the way
  • Company limits dilution
  • Company has a large enough potential to not dilute the market
  • Company doesn’t face any disruption in the market due to competition

If all this come true; this investment will generate a decent return of 34% at today’s valuation (which has dropped roughly 40% from the previous high.

BTW: If we take the same assumptions but at the previously high price of $140 / share we get a return estimate of 23.5% on the low end.

I guess it is up to each person to determine the risk/reward…

tecmo

PS: I personally think that if they do perform to these levels they will get bought out much sooner than 5 years; probably when they hit a revenue base of $1B or so (if not sooner).

7 Likes

tecmo, did you just call 34% a year a “decent” return?

6 Likes

Astute reasoning and a great case. Thank you.

🆁🅶🅱
There’s battle lines being drawn …Nobody’s right if everybody’s wrong

Great dive, Chris! What a history!

One thing I found interesting was that during the Great Recession (like you said, the worst since the Depression) the rev growth rate slowed from 50% down to 20%, but they didn’t stop growing, or even have negative growth like a lot of companies did, but plateaued around 20% for a time, then went back up to the mid to high 30% growth rate, right about where they would have been had the recession never happened.

A lot of folks talk about a recession coming, and have wondered how our companies would react to such an event. Nice to see that CRM handled it pretty well. Yes, the EV/R valuation dropped significantly during that time, but the business kept growing.

13 Likes

First of all, Chris, incredible work. Thank you for putting in the time – I think your conclusions will spark a lot of interesting thought and hopefully discussion.

My first reaction is just amazement at how smooth their ascent has been. I’m talking about the stock price too. Look at that chart! Other than during the Great Recession, what’s the biggest pullback they’ve had? Can’t be more than about 30%. And not many times was it more than 15 or 20%. And your numbers bear that out, as the multiples have been within a pretty steady band.

To me the take away is that they really never got overvalued. Perhaps another way to say this is: they were always undervalued. Think about it: should a company be able to provide a CAGR of about 26% almost independent of when you bought it over a 15 year period? Of course not. The market has never captured the value of their potential. Salesforce (CRM) has been climbing a wall of worry for its entire history!

My second thought is: do you think they’re still undervalued? If they show no signs of slowing down, it seems that going forward they should provide investors a CAGR of only slightly less than their historical 26%. Heck, they may even be buying back stock by now for all I know. Seems like they’re still not being given full credit for (the present value of) likely future cash flows.

Thanks again for this.

Bear

19 Likes

Bear,

For CRM since 2004 I’m seeing a 3,400% total return and roughly 11 times it was down 20% from all time highs, 6 times it’s been down 30%+, twice it’s been down 40%+ and once it was down 50% + (using Ycharts).

Happy to share the chart with anyone who wants it. Just email me.

7 Likes

it was down 70% from ATH in 08.

4 Likes

tecmo, did you just call 34% a year a “decent” return?

I did- it was a reflection of the risk/reward. My point is that at current prices most of the upside is already priced in (this was even more so the case a few weeks ago when prices were much higher).

A lot has to go right (and certainly they have performed very well already) for this to be a great investment. If anything goes wrong it will likely result in big losses for those that are investing at current levels.

BTW: I also think the 5 year upside is limited as I think they will get bought out before they ever hit those levels (assuming they continue to perform).

tecmo

4 Likes

Chris: CRM definitely qualifies as a company that is comparable to our SaaS companies.

First of all, many thanks for generously sharing your comprehensive background about Salesforce (CRM), a company that I continue to greatly admire and respect for its ongoing success.

One of the primary reasons that I made my initial investment in Carvana (CVNA) was due to its management’s astute decision to go with Salesforce. As Janette Blatz, Product Track Lead, Carvana stated: “The month before we launched Salesforce, we had about four million dollars in monthly revenue. Less than three years later, we have 80 million dollars in monthly revenue and Salesforce has really enabled that.”
For those interested here’s the Salesforce CUSTOMER CASE STUDY about Carvana that reveals why Carvana needed highly sophisticated customer relationship management and how Service Cloud helped Carvana move into the fast lane.
https://www.salesforce.com/products/service-cloud/resources/…
Key excerpts:
Carvana’s approach to selling used cars has really been embraced by a new generation of consumers. “When we launched, very few customers were interested in a mobile purchase flow where you’re buying a car entirely online from your phone,” said Blatz. “Now over half of our purchases come through our mobile ecommerce site, aided by things like Messaging for SMS. Salesforce has tons of different features that allow us to experiment and keep up with a changing industry.”
Even with the world’s number one service platform, selling cars entirely online still comes with a great deal of complexity. The product team spends a lot of time studying user behavior so they understand every area of the business. They continue to create a smooth customer experience by adding Salesforce products and building simple solutions inside of Salesforce that help various departments communicate seamlessly. Service Cloud has enabled Carvana to break down the silos that existed between sales and service — and turn customer service into a profit center rather than a cost center.
Looking Down The Road
As Carvana grows, the company is finding new use cases for Salesforce products. Greater sales volume means that scheduling car deliveries is becoming too complex for manual processes so Carvana is investigating the possibility of using Field Service Lightning to help calculate routes and build schedules for the employees. And with increasing traffic to the website, Service Cloud Chat for Web will help the company facilitate a real-time chat communication with customers across their website, deepen relationships, and ultimately capture more business.
“We live in a dynamic world and consumer expectations are constantly changing,” said Blatz. “In order to compete, we need to change just as quickly and adapt to new market conditions.”

Using Salesforce has helped Carvana blaze new trails through an old industry. In the process, they’ve created a loyal customer base and succeeded in setting a new standard for the whole car buying process. In the words of Teresa Aragon, “We’re venturing into something totally new and exciting which wouldn’t be possible without Salesforce.”

Beyond Salesforce, Carvana selected several up and coming SaaS companies previously brought up at this board, e.g., RingCentral and Okta. As a replacement for its expensive and limited capability hardware-based legacy PBX system, Carvana chose RingCentral for its integrations with Salesforce and Okta. The integration creates an unparalleled experience for making or receiving calls through RingCentral, directly from within Salesforce. Also, RingCentral’s integration with Okta allows Carvana employees to use Single Sign-on to securely access RingCentral anytime, anywhere, and from any device. Using Okta Single Sign-On, Carvana employees have access to 102 applications, including RingCentral, G Suite, Atlassian, Salesforce, and Slack. Everyone’s profile goes into Universal Directory, which pushes the relevant information out to RingCentral and other applications and accounts automatically. Lifecycle Management turns new account provisioning into a simple process. On Day One, new employees can be productive and have all their communication tools in hand.
https://www.okta.com/customers/carvana/

Given Salesforce’s proven long-term growth and success, I trust that up and coming SaaS companies, associated and integrated with Salesforce, as well as others extensively discussed at this board AND their clients will also reap highly rewarding financial outcomes.

Regards,
Ray

6 Likes

Chris,
That is a good one. Sometime back I did a similar but much less detailed analysis. I compared CRM, WDAY and NOW as they grew from around $200M to $3B. Here are the excerpts:

NOW grew its revenue from $177M to $3.01B in 7 years at CAGR of 49.9%. Its stock grew at a CAGR of 39.5%. P/S dropped by 10% (17 to 15.2) and dilution was around 5.9%/year.
WDAY grew its revenue from $310M to $3.03B in 6 years at CAGR of 46.2%. Its stock grew at a CAGR of 19.7%. P/S dropped by 57% (38 to 16.5) and dilution was around 6.4%/year.
CRM grew its revenue from $274M to $3.05B in 7 years at CAGR of 41.1%. Its stock grew at a CAGR of 28.3%. P/S dropped by 30% (11.8 to 8.2) and dilution was around 4.3%/year.

All 3 are great companies. But clearly WDAY with its high starting P/S yielded lower share price returns over this period.
Things get even more interesting if you look at the period up to when these companies hit $1.5B revenue. The stock price returns (CAGR) of NOW, WDAY and CRM were 30.2%, 5.5%, and 38.6% respectively. So, lot of share price appreciation for NOW and WDAY but not CRM when these companies went from $1.5B to $3B due to multiple expansion as we have been seeing recently.

14 Likes

Great and all, except…SHOP.

I did a comparison of SHOP with CRM more than year ago as I was seeing revenue per customer and how most of SHOP’s customers would not be profitable, and only a small portion of the customers were. Also, the long tail, as customer numbers grow, quality of customers would suffer. I then went through and calculated they would need 3 million customers.

SHOP is now at 1 million customers. Sure, at some point SHOP’s share price growth will ameliorate or even go negative. But we have been (many of us, off and on) since SHOP was a $4 billion market cap company. Fortunately I did not start doing it until it was a quadruple. But the, sure enough, I did it as well.

So how does SHOP fit into this model? The answer is, it does not. Companies are not just numbers in a spreadsheet. They are not analytical perfection, mathematical beauty. Instead, they have lives of their own to reflect their uniqueness. Because CRM and NOW did this, does not in any manner indicate SHOP will do that.

The problem is, when? When SHOP was obscenely overvalued at $4 billion market cap (btw/ it wasn’t, it was obscenely undervalued then which is why I bought 50% of my port with it and held back from 100% trying to be, “prudent”), or when it was obscenely overvalued at $10 billion, $15 billion, $20 billion, perhaps now at $30 billion? Maybe now. But prospectively at each point in time the same was and could have been stated.

Tinker

3 Likes

NOW grew its revenue from $177M to $3.01B in 7 years at CAGR of 49.9%. Its stock grew at a CAGR of 39.5%. P/S dropped by 10% (17 to 15.2) and dilution was around 5.9%/year.
WDAY grew its revenue from $310M to $3.03B in 6 years at CAGR of 46.2%. Its stock grew at a CAGR of 19.7%. P/S dropped by 57% (38 to 16.5) and dilution was around 6.4%/year.
CRM grew its revenue from $274M to $3.05B in 7 years at CAGR of 41.1%. Its stock grew at a CAGR of 28.3%. P/S dropped by 30% (11.8 to 8.2) and dilution was around 4.3%/year.

All 3 are great companies. But clearly WDAY with its high starting P/S yielded lower share price returns over this period.


This is exactly why I don’t understand people jumping into ZM, CRWD, DDOG, WORK, and ZS when their P/S was over 30/40/60. I don’t care how great their metrics are…if you dig yourself into that deep of a hole, you limit the stock price CAGR.

Nice work with the above numbers.

Dreamer

8 Likes

I am with you bro. WDAY went from a TTM rev of $310M to $1.58B in 3.75 years, i.e. a remarkable CAGR of 54.3%! Yet its P/S went from 38 to 11.4 and coupled with stock dilution the share price went from $68 to $83 (CAGR was a measly 5.5%!). This was in the 2013-2016 period and the share price return probably trailed SP500. On the other hand CRM and NOW gave solid share price returns throughout the period.

4 Likes

Chris,

Thanks so much for such an incredible post. I think this post is worthy of re-reading every few months as it is full of great information that can help us analyze and compare versus the companies we are invested in today. I know I have it bookmarked and plan to revisit it frequently. Appreciate all the hours spent towards putting this together.

Looking at the data and your comparison to AYX prompted me to take a look today at a handful of the companies I own (including AYX). I did not go into the same detail as you did, but just took my best stab at forecasting future cash flows and assigning them a multiple to get a better idea of what the CAGR might be in different scenarios. I created three different scenarios - a worst, middle, and best case. I used 6% dilution for each scenario for AYX, COUP & CRWD. Obviously these are all made up entirely of assumptions, but I figure things will likely end up somewhere in between these wide ranges. These are my personal assumptions, with my best guess closest to the middle scenarios. Here is what I came up with:

AYX: Currently my largest holding. Like everyone else here, I see a company that is crushing it. The last two earnings reports have been remarkable. It is yet to be seen how it will hold up in today’s environment, but I can’t help but think a price of around $80 will turn out to be quite the gift long-term.


Worst Case: 
	 Rev 	 Growth	 FCF	Margin	 Shrs O  P/FCF   Mkt Cap Price  CAGR
2019	 $418    65%	 $23 	5%	 65.4    235     5.3     $81.7
2020	 $555	 33%	 $11 	2%	 69.3 
2021	 $722 	 30%	 $58 	8%	 73.5 
2022	 $902 	 25%	 $108   12%	 77.9 
2023	 $1,082  20%	 $195   18%	 82.6 
2024	 $1,245	 15%	 $311   25%	 87.5    25      7.8     $88.9  2%

Middle Case: 									
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $418 	65%	 $23 	5%	 65.4 	235	 5.3 	 $81.7 	
2020	 $627 	50%	 $31 	5%	 69.3 	 	
2021	 $928 	48%	 $93 	10%	 73.5 		
2022	 $1,317 42%	 $237 	18%	 77.9 	 	
2023	 $1,778 35%	 $409 	23%	 82.6 		
2024	 $2,312 30%	 $694 	30%	 87.5 	40	 27.7 	 $317.0 31%

Best Case:
	 Rev    Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $418 	65%	 $23 	5%	 65.4 	235	5.3 	 $81.7 	
2020	 $669 	60%	 $67 	10%	 69.3 				
2021	 $1,036 55%	 $176 	17%	 73.5 				
2022	 $1,555 50%	 $373 	24%	 77.9 				
2023	 $2,254 45%	 $676 	30%	 82.6 				
2024	 $3,156 40%	 $1,105	35%	 87.5 	60	66.3 	 $757.2 56% 

Thoughts: With the worst case, I am assuming the virus seriously derails this business and they are not able to get things back on the tracks. I consider this highly unlikely, and that is why it is worst case. My best guess is AYX sees a bit of a slow down in 2020 due to the virus, and growth slows a decent tick to 50%. I would be very pleased with this, but we will have a much better picture once they report for Q1. Best case is the rosiest of rose (as for all the forecast), and do see them clearing this bar but then again, I did not anticipate revenue to accelerate like it did in late 2019.

COUP: Both in the SaaS melt down in 2019 and now with the recent market-wide drop, Coupa has held up much better than many of its peers. Not sure if the market is trying to tell us something about this company and its runway, but with TTM sales nearly ~$30 million less than Alteryx and growing a solid bit slower, the market has rewarded this company a market cap nearly $3B, or 53% higher than Alteryx. Interesting to say the least.

 
Worst Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $390 	50%	 $55 	14%	 64.8 	150	 8.2 	 $126.3 	
2020	 $546 	40%	 $82 	15%	 68.7 				
2021	 $709 	30%	 $128 	18%	 72.8 				
2022	 $887 	25%	 $177 	20%	 77.2 				
2023	 $1,064 20%	 $234 	22%	 81.8 				
2024	 $1,224 15%	 $306 	25%	 86.7 	25	 7.6 	 $88.2 	-7%

Middle Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $390 	50%	 $55 	14%	 64.8 	150	 8.2 	 $126.3 	
2020	 $565 	45%	 $102 	18%	 68.7 				
2021	 $791 	40%	 $174 	22%	 72.8 				
2022	 $1,068 35%	 $267 	25%	 77.2 				
2023	 $1,388 30%	 $389 	28%	 81.8 				
2024	 $1,736 25%	 $573 	33%	 86.7 	40	 22.9 	 $264.2 16%

Best Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $390 	50%	 $55 	14%	 64.8 	150	 8.2 	 $126.3 	
2020	 $577 	48%	 $104 	18%	 68.7 				
2021	 $819 	42%	 $188 	23%	 72.8 				
2022	 $1,130 38%	 $316 	28%	 77.2 				
2023	 $1,492 32%	 $477 	32%	 81.8 				
2024	 $1,910 28%	 $668 	35%	 86.7 	60	 40.1 	 $462.5 30% 

Thoughts: We’ve seen this company continue to make amazing strides in cranking up profitability year after year consistently. FCF margins have improved from -31% to 14% in the last 5 years! You can see above that I believe they will continue this trend. I don’t know what lies ahead in terms of revenue growth for Coupa, but I do feel much more certain that they will reach their FCF goal of 30-35% than AYX based off how they have performed. I also see the virus as less of an impediment to their business (might even help in the long run). Maybe these two things explain the big gap in valuation between the two? I do believe this gives them less upside however, as seen in the CAGR figures.

CRWD: Crowdstrike has helped keep my portfolio afloat during the last month plus. I was lucky to add some prior to the earnings (which was an incredible report) and now they sit as my second largest holding. Based off that CC, I think Crowdstrike is going to hold up well this year and will continue to be a safe space in the storm.

 
Worst Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $481 	94%	 $13 	3%	 213.2 	986	 12.3 	 $57.8 	
2020	 $842 	75%	 $25 	3%	 226.0 				
2021	 $1,264 50%	 $88 	7%	 239.6 				
2022	 $1,769 40%	 $177 	10%	 253.9 				
2023	 $2,300 30%	 $322 	14%	 269.2 				
2024	 $2,760 20%	 $552 	20%	 285.3 	25	 13.8 	 $48.4 	-4%

Middle Case:
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $481 	94%	 $13 	3%	 213.2 	986	 12.3 	 $57.8 	
2020	 $886 	84%	 $35 	4%	 226.0 				
2021	 $1,506 70%	 $120 	8%	 239.6 				
2022	 $2,409 60%	 $361 	15%	 253.9 				
2023	 $3,614 50%	 $759 	21%	 269.2 				
2024	 $5,060 40%	 $1,316 26%	 285.3 	40	 52.6 	 $184.4	26%

Best Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $481 	94%	 $13 	3%	 213.2 	986	 12.3 	 $57.8 	
2020	 $915 	90%	 $55 	6%	 226.0 				
2021	 $1,646 80%	 $165 	10%	 239.6 				
2022	 $2,799 70%	 $504 	18%	 253.9 				
2023	 $4,478 60%	 $1,030 23%	 269.2 				
2024	 $6,717 50%	 $2,015 30%	 285.3 	60	 120.9 	 $423.8 49% 

Thoughts: I had the hardest time forecasting CRWD’s FCF margin. I have not seen any targets from CRWD related to FCF margin, only Op Margin of 25-30% based off their slides. However, in their most recent report their FCF margin was 33% while growing at a 89% clip!! Unreal!! If this is any indication of where they are headed, then all of those forecast above are on the conservative side. With their growth, I think the upside for this company is massive, although less than AYX due to current valuations. Happy to have them as my second largest holding.

PAYC: Sadly, this is a company that has remained in my portfolio over the last month, riding it all the way down from above $300 to now $165/share. I love its consistency and profitability. There’s no question this company is going to be negatively impacted by the virus, but I believe they will recover afterwards and resume the march higher. I have no plans on selling now at this price, even though I acknowledge it will be a bumpy ride, because I think long-term this company is going to be a winner. I used only 3% dilution as they are already buying back shares today.

 
Worst Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $738 	30%	 $131 	18%	 58.8 	74	 9.7 	 $165.3 	
2020	 $848 	15%	 $102 	12%					
2021	 $976 	15%	 $176 	18%					
2022	 $1,073 10%	 $236 	22%					
2023	 $1,180 10%	 $295 	25%					
2024	 $1,239 5%	 $335 	27%	 68.2 	25	 8.4 	 $122.7 -6%

Middle Case: 
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $738 	30%	 $131 	18%	 58.8 	74	 9.7 	 $165.3 	
2020	 $915 	24%	 $137 	15%					
2021	 $1,143 25%	 $229 	20%					
2022	 $1,395 22%	 $307 	22%					
2023	 $1,632 17%	 $408 	25%					
2024	 $1,877 15%	 $563 	30%	 68.2 	35	 19.7 	 $289.1 12%

Best Case:
	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $738 	30%	 $131 	18%	 58.8 	74	 9.7 	 $165.3 	
2020	 $937 	27%	 $169 	18%					
2021	 $1,199 28%	 $240 	20%					
2022	 $1,499 25%	 $360 	24%					
2023	 $1,829 22%	 $512 	28%					
2024	 $2,194 20%	 $702 	32%	 68.2 	40	 28.1 	 $412.1 20% 

Thoughts: Maybe my growth assumptions are too optimistic for this company, but I don’t foresee any customers leaving Paycom, the question is how many of their customers go out of business. I think this virus might help drive more customers to Paycom as HR functions are likely pushed to limits during this time and management might realize it is time for a change post pandemic. Who knows, but the upside on this company is less because I do not think they will receive the same FCF multiples as the faster growing businesses above.

VEEV: As you can see, my portfolio includes more stocks than most who post regularly here. Veeva is simply a cash producing machine, much like Paycom. I think that is a good characteristic to have as we are spiraling towards a recession. They are more mature than the other companies listed, but I believe they can reach their goal of $3B in revenue in 2025 with op margins of 35%+. If this is the case, then they are sure to be worth much more than they are today. Since they are larger and further along the ‘S-curve’ I have only run one scenario. I also used 3% dilution for VEEV.


	 Rev  	Growth	 FCF 	Margin	Shrs O	P/FCF	Mkt Cap	 Price 	CAGR
2019	 $1,104 28%	 $434 	39%	 149.3 	52	 22.6 	 $151.2 	
2020	 $1,380 25%	 $552 	40%					
2021	 $1,698 23%	 $679 	40%					
2022	 $2,037 20%	 $815 	40%					
2023	 $2,383 17%	 $953 	40%					
2024	 $2,741 15%	 $1,096 40%	 173.1 	40	 43.9 	 $253.4 11% 

Thoughts: Along with CRWD, Veeva has been my other shining spot in 2020. Currently up 5% YTD, they are helping offset some of my big losers, like Paycom. I assume this is thanks to the fact that they serve mainly the life science industry, which is in full overdrive mode to find a cure for the virus. I think Veeva has a great runway ahead and will soon shift towards serving customers outside of the life science industry such as cosmetics and chemicals. Their vault software is starting to really take off and actually helped Veeva’s revenues accelerate in 2019. Their profitability metrics have also improved year after year, and I see no reason to believe why this trend would not continue. Lots of stocks have been mentioned on this board in regards to which are ‘virus-proof’ if you will, and I have not seen Veeva mentioned but maybe it is worth a closer look.

To conclude: If you have made it this far, thank you for reading. Chris, thanks again for the wonderful post and giving me this idea. I am hoping others can find some sort of insights from it. My biggest takeaways are, 1) revenue growth is incredibly important for maximum CAGR (go figure), and 2) nobody knows the future. As is obvious from above, those that can grow the top line the fastest offer the greatest upside, assuming they can produce FCF. However, at the end of all this, everything above is full of assumptions which are even more unknown know in the wake of our current economic environment. I will be eagerly awaiting late April/early May once these companies begin to report and we will have a much better idea of what to expect for 2020. I just found it interesting to run some scenarios to get an idea of what to expect in terms of CAGR based off what Chris provided as CRM as a guide. One of the largest unknowns however, is what multiple the markets will be giving these companies at that time. I tried to follow the CRM example, but a lot can change in five years. In 2024 who knows where we will be, but I think these stocks above will be winners.

Stay safe.
RW

25 Likes

If you use a CRM like HubSpot, marketing should keep these up to date so sales can access and distribute them during the nurturing process. Otherwise, use a consistent naming convention, place them in a folder with read-only access for sales, and save them as pdfs for them. Salespeople are notorious for changing slides, so make it simple for them to pull a pdf.

Alternatively, you can use Google Slides to create read-only decks from which they can copy and paste. It still allows them to edit the copy, which keeps me awake at night. Sales leadership and sales enablement should double-check outbound decks.

However, if each department creates its own database, silos will form, impeding collaboration and inevitably increasing workload.

Avoiding data silos is critical, especially if you want accurate analytics and reports on your company’s performance.

A good CRM for SaaS businesses (https://www.subscriptionflow.com/crm-for-saas/) should be able to generate specific and detailed reports on things like customer retention, revenue generation, customer lifetime value, churn rate, and so on.

1 Like