This is just a theory on present valuations, but perhaps the market is thinking that some “younger” companies’ revenues are likely to quickly grow to levels similar to other SAAS companies? Take a look at the market caps of some companies with less than 200m in TTM revenue:
ZS (191m): $5.3 billion market cap
AYX (162m): $3.7 billion market cap
TLND (176m): $2.1 billion market cap
MDB (192m): $4.3 billion market cap
INST (185m): $1.4 billion market cap
Compare to some more mature companies with around 500m in TTM revenue:
WIX (513m): $5.4 billion market cap
PAYC (498m): $9.3 billion market cap
TWLO (493m): $8.3 billion market cap
The market isn’t always going to do what it’s always done. Three years ago Paycom’s TTM revenues were around 200m. Yet Paycom was valued at only about $2b. It’s now over $9b. The market has evolved and learned from this. If it thinks ZScaler will resemble Paycom 3 years from now, it’s not going to value ZS at $2b, but much higher.
There’s a range of outcomes, of course, and a discount. If ZS in 3 years = Paycom today, you wouldn’t expect ZS’s market cap today to be $9.3b, like Paycom’s. There’s a discount for the fact that the outcomes are unknown, and for the time value of money. But the $5.3b ZS valuation seems to suggest that it will look more like Paycom in 3 years that Wix, which has about the same revenue but much less profit…yet. (Growth rate is also a factor, as with Twilio, which is unprofitable, but growing much faster than Wix or Paycom).
Talend and Instructure aren’t being given anywhere NEAR as much credit as ZS or MDB. This may be warranted. In 3 years, I don’t think it’s likely that Instructure will be anywhere near where Paycom is now. Talend might. I believe that Talend’s trajectory will be more favorable than the market’s current expectations, and that therefore now is a good time to buy. Either I will be wrong, or the market will eventually catch on and Talend’s price will go up.
With ZScaler, there’s not as much room for the valuation to grow with the company’s results. That said, in three years it could easily be a much more valuable company (certainly there’s potential for it to double or better). I guess my takeaway is that there’s less margin of error there, since it’s already credited with so much of its potential value.
I’d love to hear others’ thoughts.