Great write-up, Pat. For argument's sake, will take the other side:
1/ Can't pay fixed charges with ARRs. Mr. Market is clearly stating that in a recessionary environment FCF positive operators should be valued at a premium vs. those with a potential to get there. You say buy the blue b/c it's going to green, but the market is saying the blues haven't yet figured out how to convert to revenue to cash (likely since their APE is too low vs. cash burn) and we are not certain that they ever will (e.g., they are more likely to become red vs. green).
2/ If you are institutional/patient capital, why not wait 1 (or 2 or 3...) more quarters and see if valuations continue to slide, given macro? Decent chance we aren't at the bottom yet (pg. 4, bottom tables), so would expect valuations to continue to deflate, making a more attractive bargain to come in later. For ex., the % of companies in the >30% NTM growth is the same in Q1'22 vs. FY'21 (pg. 3), but fewer of them (13) are growing at a 40% growth rate than just 1 quarter ago (17). Sometimes being too early (and correct) is not too far off from being wrong.
IMO, a fairer question should be not whether we should be investing in SaaS growth (personal/biased view is a resounding "yes"), but how much we should be willing to pay for it. Top of pg. 4 is helpful. >40% NTM growth aside, all categories of growth SaaS are now "cheaper" vs. what they were in '19 and almost as "cheap" as what they were in '17. So, what's the right attachment point? As always, DYODD :)
Great write-up, Pat. For argument's sake, will take the other side:
1/ Can't pay fixed charges with ARRs. Mr. Market is clearly stating that in a recessionary environment FCF positive operators should be valued at a premium vs. those with a potential to get there. You say buy the blue b/c it's going to green, but the market is saying the blues haven't yet figured out how to convert to revenue to cash (likely since their APE is too low vs. cash burn) and we are not certain that they ever will (e.g., they are more likely to become red vs. green).
2/ If you are institutional/patient capital, why not wait 1 (or 2 or 3...) more quarters and see if valuations continue to slide, given macro? Decent chance we aren't at the bottom yet (pg. 4, bottom tables), so would expect valuations to continue to deflate, making a more attractive bargain to come in later. For ex., the % of companies in the >30% NTM growth is the same in Q1'22 vs. FY'21 (pg. 3), but fewer of them (13) are growing at a 40% growth rate than just 1 quarter ago (17). Sometimes being too early (and correct) is not too far off from being wrong.
IMO, a fairer question should be not whether we should be investing in SaaS growth (personal/biased view is a resounding "yes"), but how much we should be willing to pay for it. Top of pg. 4 is helpful. >40% NTM growth aside, all categories of growth SaaS are now "cheaper" vs. what they were in '19 and almost as "cheap" as what they were in '17. So, what's the right attachment point? As always, DYODD :)
Would love to see a version of that Battery slide with the companies labelled (especially in the blue zone) - do you know if that exists?