SaaS: Separating The Winners From The Losers

Nov. 18, 2022 3:37 AM ETDDOG, CRWD, CRM6 Comments
Richard Durant profile picture
Richard Durant
4.7K Followers

Summary

  • Assessing the financial prospects of rapidly growing software companies can be difficult, due to their penchant for large losses.
  • There are a number of rules of thumb used as indicators of efficiency, although these have their weaknesses.
  • Ideally, intangible expenses should be separated from expenses and capitalized, although this is difficult with publicly available information.

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Software companies have come under fire later for a lack of profitability, with some comparing the SaaS business model to shale oil production. In particular, stock-based compensation is a point of contention, which some have suggested is used to hide poor economics. While

Contribution Margin

Equation 1: Contribution Margin (source: Created by author)

Salesforce Contribution Margin

Figure 1: Salesforce Contribution Margin (source: Created by author using data from Salesforce)

Magic Number

Equation 1: Magic Number (source: Created by author)

Example Magic Numbers

Figure 2: Example Magic Numbers (source: Created by author using data from company reports)

Rule of 40

Equation 3: Rule of 40 (source: Created by author)

Revenue Growth and Operating Profit Margins for a Range of Public Software Companies

Figure 3: Revenue Growth and Operating Profit Margins for a Range of Public Software Companies (source: Created by author using data from company reports)

Datadog Rule of 40

Figure 4: Datadog Rule of 40 (source: Created by author using data from Datadog)

Crowdstrike and SentinelOne Estimated LTV/CAC Ratios

Figure 5: Crowdstrike and SentinelOne Estimated LTV/CAC Ratios (source: Created by author using data from company reports)

Incremental Asset Turnover

Equation 4: Incremental Asset Turnover (source: Created by author)

Crowdstrike Incremental Asset Turnover

Figure 6: Crowdstrike Incremental Asset Turnover (source: Created by author using data from Crowdstrike)

Salesforce Asset Turnover

Figure 7: Salesforce Asset Turnover (source: Created by author using data from Salesforce)

Dependence of Operating Expenses on Scale

Figure 8: Dependence of Operating Expenses on Scale (source: Created by author)

Dependence of Operating Expenses on Growth

Figure 9: Dependence of Operating Expenses on Growth (source: Created by author)

Salesforce Adjusted Operating Profit Margins

Figure 10: Salesforce Adjusted Operating Profit Margins (source: Created by author using data from Salesforce)

Crowdstrike Adjusted Operating Profit Margins

Figure 11: Crowdstrike Adjusted Operating Profit Margins (source: Created by author using data from Crowdstrike)

Crowdstrike Asset Turnover

Figure 12: Crowdstrike Asset Turnover (source: Created by author using data from Crowdstrike)

Dependence of Crowdstrike's Operating Expenses on Scale After Capitalization

Figure 13: Dependence of Crowdstrike's Operating Expenses on Scale After Capitalization (source: Created by author using data from Corwdstrike)

Dependence of Crowdstrike's Operating Expenses on Growth After Capitalization

Figure 14: Dependence of Crowdstrike's Operating Expenses on Growth After Capitalization (source: Created by author using data from Crowdstrike)

LTV/CAC and Estimated Operating Profit Margins at Maturity

Figure 15: LTV/CAC and Estimated Operating Profit Margins at Maturity (source: Created by author using data from company reports)

This article was written by

Richard Durant profile picture
4.7K Followers
I have been managing my own investment portfolio for the past 9 years with a focus on fundamental research and deep value investing over long time horizons. My primary interest is finding early stage innovations which will create long-term value. I have a Bachelors degree in finance, an MBA and have completed the CFA and CMT exams.richarddurant.substack.com

Disclosure: I/we have a beneficial long position in the shares of CRWD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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