Here’s how I calculate the Oomph Factor: I have it in table form on a spread sheet, but I’ll describe it in words here so you can follow what I do.
I decided a 10% bump for recurring revenue was inadequate. The recurring revenue is what our SaaS companies are all about after all, so I decided, for myself anyway, to use a 20% bump for 100% recurring revenue.
First I collect the basic statistics:
Enterprise Value is straight forward, as of the day I’m calculating it.
For Revenue I use the last reported quarter and multiply by four. That way I’m not using the past (trailing 12 months) and I’m not guessing the future. I’m using the here and now. We take growth into account later.
For Growth Rate and Gross Margin and Percent of Recurring Revenue, I also figure as of the last quarter. No “2018 growth rate” or “next twelve months growth rate,” etc.
Those five are all I need. Now a couple of examples. These are as of last weekend when I calculated them:
Let’s start with Zscaler, our poster-child for an overpriced SaaS company.
EV of $7.8 billion divided by revenue of $296 million gives us a bare EV/S of 26.4.
Now we get the numbers to put into our Oomph. The growth rate was 65% so growth rate squared (1.65 x 1.65) equals 2.72. Gross margin was 80% and Recurring revenue was 100% so we multiply that 2.72 times 0.8 times 1.2 to get my Oomph factor of 2.61. Almost finished. We divide the EV/S by the Oomph factor and we get an EVSO of 10.1. That looks a heck of a lot better than 26.4, doesn’t it?
Now Trade Desk, a different kind of company. EV of 9.7 and revenue of 642 gives an EV/S of 15.1. Then growth of 56%, gives growth squared of 2.43. Growth margin of 78%, and I gave them recurring revenue of zero (sorry, that’s what it is). So 2.43 times 0.78 x 1.0 = an Oomph of 1.90. And EV/S divided by Oomph gives an EVSO of 7.95.
Next, a non-tech stock, Invitea. EV of 1.85 divided by sales of 180 gives an EV/S of 10.3. They grew revenue at 61% last quarter for a growth rate squared of 2.59. A gross margin of 53 and a recurring revenue of zero like Trade Desk’s gives them an Oomph of 1.37, and then an EVSO of 7.52.
Let’s do Alteryx quickly: EV 5.25, Rev 304, EV/S 17.3, Growth 51%, Growth Squared of 2.28, margin of 89% recurring revenue of 96% (mult by 1.192 because 20 x .96 = 19.2) = Oomph factor of 2.42 and an EVSO of 7.15.
For Twilio, I could find Growth rate of 81%, gross margin of 58%, but I couldn’t find recurring revenue anywhere. I had to make a guess, and after some thought I guessed 70% recurring, and I got an Oomph of 2.17. and got an EVSO of 7.47. (But don’t think that the guess was the determining factor. Even if I had guessed just 30% recurring revenue, the EVSO would have been a respectable 8.02).
For a bigger number Okta, with an EV/S of 24.7, a growth rate of 50%, a GM of 76%, and recurring rev of 93%, had an Oomph of 2.03, and an EVSO of 12.17. I think it’s so high because of all the things that they announced at their conference and that muji told us about in his excellent deep dive last month.
Finally, for an eye-opener, we have Zoom, with an EV/S of 47.5, but a growth rate of 108%, and growth squared of 4.33. Gross margin of 86% and 100% recurring, and we get an Oomph of 4.47 and an EVSO of 10.63. High, but less than Okta’s and not much above Zscaler’s. (It was that 108% growth rate that made the difference, and pulled it back down. This shows that if you give Zoom credit for that very high growth rate, high gross margins, and high recurring revenue, it brings it down into reasonable range. Then we have to decide if it merits that.
Hope that this was useful.