I see tons of posts on Twitter and this board making simplistic arguments on valuation and why high growth multiples will crash. Let me give you a few reasons why SaaS multiples WON’T go back to historical levels:
(1) Multiples are influenced by interest rates. Even with the recent move higher in the 10 yr treasury, we are still in a very low rate environment and will likely be in a low rate world into the foreseeable future. You can’t compare multiples to historical periods with much higher rates.
(2) The tech giants are like MSFT are not derating in multiple in this sell off. If you value high growth SaaS by applying a mature tech multiple to revenues 10 years in the future, this future value that you are owning stocks for has not changed at all. All that’s happening is your expected IRR is increasing as people panic sell.
(3) COVID has accelerated a transition to a WFH environment that in general greatly benefits SaaS companies. So far there has been zero growth decay even as we lap COVID quarters. In fact, many of the best SaaS names are still accelerating revenue. This suggests something has changed post COVID, which supports higher multiples.
(4) SaaS was a relatively new sector a few years ago and the multiples were not representative of fair value. We know this because SaaS has returned wayyy above average returns, meaning the old multiples were way too low. Now people understand the value proposition and will not leave money on the table allowing high growth SaaS to fall to the 10-20x range again.