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While Bessemer Venture Partners has done a fairly good job of tracking the public SaaS companies with their ~38 company cloud index, their index is not comprehensive and it includes several companies that are not SaaS companies that target business customers. For example, LifeLock (NYSE:LOCK) is consumer focused and not really SaaS while LinkedIn (NYSE:LNKD) is an internet social network that monetizes partially with advertising.

Using Screener.co, and its data as of 2/24/2014, I constructed a watch list of 50 public business SaaS companies and calculated aggregate and weighted average metrics in the table below (dollar figures in millions):

Totals

Market Cap

$ 173,202

Enterprise Value

$ 169,136

Revenue

$ 13,766

EBITDA

$ 571

Net Income

$ (665)

FCF

$ 1,326

Weighted Average

P/S

12.6

EV/Revenue

12.3

EV/EBITDA

296.1

P/E

n/a

EV/FCF

127.6

P/FCF

130.6

TTM/TTM Rev Growth

39.43%

With an aggregate market cap of over $173B on only $13.8B in revenue, the aggregate price/sales ratio is over 12! Furthermore, in aggregate, the SaaS companies in the index produce negative net income. While the GAAP accounting treatment for SaaS can cause profitability to be understated (as high-margin deferred subscription revenue sits as a liability until it can be recognized), the weighted aggregate P/FCF ratio is over 130! That means the aggregate cash flow yield of the companies in the index is less than 1%.

Bulls may try to justify these valuations based on the high weighted average revenue growth rate of 39.4%. However, business IT spending is very cyclical-and has risen substantially from the depths of 2008 and 2009. To project similarly high growth rates, in aggregate, out 5 or 10 years (with a high terminal growth rate, to boot) just seems unreasonably aggressive.

In a recent post, I implied that lofty tech valuations were reminiscent of the late 1990s tech bubble. That post related to the WhatsApp acquisition and social networking sites being valued based on the number of users rather than the business fundamentals. However, the significant premium that investors are willing to pay for the high business SaaS growth rates is also a sign of froth.

While Bessemer points out that their index has far outperformed the major broad-based stock market indexes since January 2012, the current valuations can only be sustained if growth is stable or accelerates and margins expand significantly.

As owner of a private SaaS company (Screener.co), I am encouraged by investor enthusiasm for the sector. However, I would be wary of paying 10+x revenue and 100+x cash flow for most of the businesses in this index. At those valuations, it would seem to me that much of the value of that growth is already priced into the company's current valuation. Instead, it might be worth giving traditional enterprise software companies, and their lower multiples, another look. Companies like Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL) are transitioning some of their software offerings to subscription models, and trade at 3-5x revenue instead of 10+x. Workday (NYSE:WDAY) already has an enterprise value of >1/10x all of Oracle despite having <1/75x the trailing revenue and limited free cash flow.

SaaS is now widely recognized as an important, and disruptive, new paradigm for software delivery. VC firms that saw the potential for SaaS early on, like Bessemer, are being rightfully rewarded for their insight. However, I believe that investors buying in now are a bit too late to the party.

The full data is below:

($ in millions)

Symbol

Company Name

Market capitalization

Current Enterprise Value (NYSE:EV)

Revenue-trailing 12 month

Normalized EBITDA(NYSE:I) + Normalized EBITDA(I-1) + Normalized EBITDA(I-2) + Normalized EBITDA(I-3)

Net Income Before Extraordinary Items-TTM

Free Cash Flow-trailing 12 month

Revenue Change-TTM over TTM

NYSE:CRM

salesforce.com, inc.

38,345

40,099

3,760

109

(136)

606

32.06%

NYSE:

Workday Inc

18,166

17,362

409

(106)

(147)

(40)

73.65%

NASD:SPLK

Splunk Inc

10,041

9,689

268

(46)

(53)

54

51.45%

NYSE:NOW

ServiceNow Inc

9,609

9,389

425

(42)

(74)

26

74.24%

NYSE:N

NetSuite Inc

8,631

8,434

415

(38)

(70)

40

34.22%

NASD:ATHN

athenahealth, Inc

7,291

7,450

595

67

3

26

40.91%

NASD:CNQR

Concur Technologies, Inc.

7,193

7,001

586

38

(37)

33

26.79%

NYSE:DATA

Tableau Software Inc

6,034

5,781

232

11

7

20

81.97%

NASD:ULTI

The Ultimate Software Group, Inc.

4,716

4,635

410

59

26

44

23.51%

NASD:AZPN

Aspen Technology, Inc.

4,385

4,166

349

98

69

159

27.30%

NYSE:VEEV

Veeva Systems Inc

4,367

4,094

187

 

23

30

n/a

NZE:XRO

Xero Limited

4,210

4,165

44

(24)

(20)

(28)

85.18%

NASD:MDSO

Medidata Solutions Inc

3,458

3,446

277

31

17

39

26.79%

NYSE:GWRE

Guidewire Software Inc

3,446

2,917

304

4

4

29

25.06%

NYSE:SWI

SolarWinds Inc

3,402

3,257

335

152

90

150

24.70%

NYSE:TYL

Tyler Technologies, Inc.

3,228

3,149

417

81

39

39

14.68%

NASD:CSOD

Cornerstone OnDemand, Inc.

3,064

2,974

185

(24)

(40)

2

57.00%

NASD:MANH

Manhattan Associates, Inc.

2,736

2,603

415

107

67

85

10.17%

NYSE:DWRE

Demandware Inc

2,622

2,347

104

(16)

(21)

3

30.53%

NASD:TRAK

DealerTrack Technologies Inc

2,402

2,269

482

75

6

34

23.83%

NASD:OPEN

OpenTable Inc

1,774

1,659

190

65

33

 

17.58%

NASD:RP

RealPage, Inc.

1,608

1,564

367

39

22

43

19.39%

NYSE:CVT

Cvent Inc

1,576

1,418

104

 

(1)

7

34.84%

NASD:BNFT

Benefitfocus Inc

1,574

1,497

97

(17)

(24)

(1)

n/a

NASD:MKTO

Marketo Inc

1,521

1,388

85

 

(40)

(21)

63.59%

NASD:PFPT

Proofpoint Inc

1,504

1,435

126

 

(21)

6

25.32%

NYSE:RNG

RingCentral Inc

1,404

1,417

148

 

(40)

(36)

n/a

NASD:EPAY

Bottomline Technologies

1,384

1,322

270

30

(21)

31

11.62%

NYSE:FLTX

FleetMatics Group PLC

1,344

1,228

163

 

19

16

n/a

NASD:WIX

Wix.Com Ltd

1,093

1,086

69

 

(21)

3

n/a

NASD:SPSC

SPS Commerce, Inc.

1,045

914

104

9

1

13

35.39%

NASD:LOGM

LogMeIn Inc

1,010

820

166

6

(8)

 

19.75%

NYSE:ECOM

ChannelAdvisor Corp

961

884

64

 

(11)

(4)

26.03%

NASD:QLYS

Qualys Inc

859

763

108

12

2

11

18.09%

NASD:EOPN

E2open Inc

833

826

69

(17)

(22)

(11)

-6.55%

NASD:LPSN

LivePerson, Inc.

723

645

173

 

(1)

3

14.49%

NYSE:IL

Intralinks Holdings Inc

622

618

229

35

(13)

18

8.01%

NYSE:TXTR

Textura Corp

621

546

41

(33)

(38)

(19)

37.48%

NASD:BV

Bazaarvoice Inc

555

480

176

(26)

(65)

(49)

32.10%

NASD:JIVE

Jive Software Inc

548

448

146

(60)

(75)

(17)

28.24%

NYSE:RALY

Rally Software Development Corp

514

419

70

 

(18)

 

33.47%

NASD:CALD

Callidus Software Inc.

498

478

112

(1)

(21)

11

18.31%

NASD:SAAS

Incontact Inc

478

437

125

 

(6)

(6)

21.99%

NYSE:MRIN

Marin Software Inc

373

268

73

 

(35)

(31)

34.53%

NASD:DWCH

Datawatch Corporation

334

329

32

(6)

(10)

(1)

21.57%

NASD:ZIXI

Zix Corporation

293

260

48

 

10

8

14.35%

NASD:BCOV

Brightcove Inc

270

233

110

(2)

(10)

3

24.92%

NASD:EGAN

eGain Corp

229

221

67

2

(0)

(2)

40.28%

NASD:ATTU

Attunity Ltd

161

159

24

 

1

2

0.82%

NASD:PCYG

Park City Group, Inc.

149

148

12

(1)

(1)

(3)

13.74%

 

Total

173,202

169,136

13,766

571

(665)

1,326

39.43%

Source: The Ultimate Business SaaS Index (50 Companies, $170+B Market Cap, Crazy Valuations)