# Valuing Saas Companies

In the ZS thread, Volfan posted:
Regarding this whole EV/S multiple discussion, I would like to point folks to the thread I made some months back over on the NPI board about a possible new valuation methodology that could perhaps guide what a “right”/“correct” multiple could be. The concept still needs further fleshing out, but the basis seems logical to me.
https://discussion.fool.com/work-in-progress-valuation-methodolo…

And at that link he posted:
Inputs:
Rule of 40 # (R40)
EV/S ratio

Calculation (subject to tweaking):
R40 divided by E/S ratio + 1-yr change in R40 divided by EV/S x adjustment factor

Not sure what magnitude the adjustment factor should have yet, but once this methodology is applied for enough different companies (maybe 5 or 25 different companies), I think a proper coefficient could be approximately determined.

The chart at this link plots the relationship of EV/S to R40 for a set of SaaS companies as of 12/31/18:
https://kellblog.com/2019/01/19/an-update-on-the-saas-rule-o…

Enjoy,
Brian

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The chart at this link plots the relationship of EV/S to R40 for a set of SaaS companies as of 12/31/18:
https://kellblog.com/2019/01/19/an-update-on-the-saas-rule-o…

## Enjoy,Brian

That looks to be a nice find, Brian. It appears to be along very similar lines to my thoughts, just without the “momentum factor” factored in.

volfan84

I find the chart suspect.

Look at TWLO, R40 score of 28.

I know TWLO grew around 60% last year and was FCF positive the last 2 quarters. I would expect TWLO to be 60 or higher for R40 score.

The chart is only as good as the data going in.

Jim

I find the chart suspect.

Look at TWLO, R40 score of 28.

I know TWLO grew around 60% last year and was FCF positive the last 2 quarters. I would expect TWLO to be 60 or higher for R40 score.

The chart is only as good as the data going in.

## Jim

That particular item does look questionable, though the first 2 quarters may have had negative FCF margin and weren’t quite at 60%, still seems like TWLO should be higher on that chart though.

volfan84

I noticed the discrepancy as well. But I like the format of the chart, as it gives more information than a single number. I’d like to see the data plotted for each company for the last 3 to 4 quarters (connected by a line), so that we can see the trend for each. I may take that on, but I won’t be able to do it right away.

Enjoy,
Brian

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