Parting the Clouds
June 13, 2022
Welcome back to Parting the Clouds from Mary D’Onofrio and Andrew Schmitt at Bessemer Growth!
It was quite a volatile week in the stock market, including a (5%) drop in all major indexes over the week and a (5%) one-day ^EMCLOUD decline on Friday in reaction to inflation data hitting a 40-year high. Multiples fell by nearly half a turn over the week, leaving the median cloud ARR multiple at 6.6x and (43%) below the trailing 5-year average. All 10 of the top 10 stock price movers this week had negative moves of at least (16%), led by Zendesk with a (28%) fall after announcing it will remain an independent company following takeover interest. Q2 Holdings similarly fell (24%) this week after announcing takeover bids came in too low. Rounding out the top 3 moves, DocuSign fell (21%) this week after reporting earnings and receiving three analyst downgrade ratings.
While the market continues its downturn, we continue to monitor which cloud companies are receiving premium valuations. High-efficiency companies — or those with both growth and profitability — are being rewarded in this market beyond those with high growth alone. For ^EMCLOUD, there is a significant valuation gap between companies with 60%+ efficiency scores and others, and the valuation premium that was placed on outsized growth in 2021 has constricted. (Note that efficiency score = YoY ARR growth rate + FCF margin.)
As the chart below shows, companies with 60%+ efficiency scores average a 21.2x ARR multiple today, whereas companies with efficiency scores between 40-60% average a 10.1x ARR multiple (a 11x difference), and companies with efficiency scores <40% average a 6.4x multiple (a further 4x difference). The higher the efficiency, the higher the multiple in this environment.
We ran the same analysis on ‘high growth’ (40%+ growth) versus ‘medium growth’ (20-40%) and ‘low growth’ (<20% growth) ^EMCLOUD members and saw that the multiples gap between high growers and low growers has declined (58%) since 2021. The delta between high and low growth was 23.7x in 2021 and has decreased to only 10x today, meaning that the valuation premium placed on high growth has muted. Today, 40%+ growers have an average 14.9x multiple whereas 20-40% growers average a 8.3x multiple and <20% growers a 4.9x multiple.
Even in the context of public cloud market volatility, we continue to see private cloud companies grow to Centaur status, or the $100 Million ARR milestone that demarcates an enduring business. We join legal software company Clio and data management company Reltio in celebrating the announcements of their Centaur statuses. We are continuing to track and celebrate the companies that achieve this incredible milestone.
See below for our summary of this week’s performance, through Friday’s close, with a deep dive on more trends thereafter.
Enjoy Part Five of Parting the Clouds.
Public Market Update
^EMCLOUD fell to down (45%) YTD, with the S&P off (18%), Nasdaq off (28%), and Dow off (14%). All of these indexes dropped at least (3%) Friday in reaction to inflation data and at least (5%) over the last week.
While the ^EMCLOUD index has traded about flat over the last month, the average and median multiple for an individual company is down about ~0.3x, reaching 7.4x mean and 6.6x median today. As a comparison, 1 years ago the average multiple was 19.6x and the median was 17.5x!
The impact of both ongoing earnings reports and M&A rumors continues to show in weekly stock prices. The moves were led by Zendesk (28%) and Q2 (24%) following cancelled M&A processes. DocuSign (21%) was the only company in the top 10 to report earnings this week.
The top 10 weekly share price movers are below:
We continue to monitor multiples vs growth and efficiency, and below is an update. The R-squared for current multiples vs. efficiency of 0.5 is slightly above that of current multiples vs. growth of 0.4, meaning that multiples are more a function of growth and profitability vs growth alone. No company in EMCLOUD trades above 20x ARR today, with Datadog remaining the highest at 19.4x ARR, though it also has efficiency close to 100%.
Private Market Update
Per Pitchbook, two companies entered the unicorn club last week, Carebridge and Perimeter 81. We are now at over 400 private cloud unicorns in a market that has seen zero cloud IPOs nearly halfway through the year. We also continue to track Centaurs, or companies that have reached $100M in ARR, and legal software company Clio announcing reaching this past week and data management platform Reltio announced doing so two weeks ago. We believe this milestone is the true mark of an exceptional cloud startup reflecting product-market fit, scalable go-to-market strategy, and a growing customer base.
That’s Part Five! We’re excited to continue to unpack public and private cloud market trends going forward and look forward to the conversations with our readers.
For more from Bessemer:
Come see us at Collision Conf in Toronto next week (week of June 20th)! We will be speaking about
For the Centaur announcements (reaching $100 Million of ARR)
This post and the information presented are intended for informational purposes only. The views expressed herein are the authors’ alone and is not intended to be, and shall not be regarded or construed as, a recommendation for a transaction or investment or financial, tax, investment or other advice of any kind. While certain information contained herein has been obtained from sources believed to be reliable, the author makes no warranty or representation regarding any such information or the data presented in such materials. The author assumes no liability for this information and no obligation to update the information contained herein in the future.