HR software business Workday has just upped the proposed share price in its coming IPO to $24-26, taking its valuation over $4bn. That’s 30x this years forecast revenues of $134m. Moreover, the company says in its filing that it has “a history of cumulative losses and we do not expect to be profitable for the foreseeable future”, and is proposing a two tier share structure that will leave the co-CEOs with control of the company.
This news prompted me to look at a couple of other SaaS businesses. Salesforce, the grand-daddy of the sector has a market cap of $21bn, which is 7.2x the revenue run-rate from the last quarter. Like Workday, Salesforce is loss making. Jive Software has a market cap of $875m, which is 8.1x the revenue run rate. Like Workday and Salesforce, Jive is loss making. Bazaar Voice has a market cap of $1.1bn, which is 7.6x the revenue run rate. Live the other companies, Bazaar Voice is loss making.
I looked at a list of other publicly traded SaaS companies which included Netsuite and Exact Target and the picture was pretty similar for every company I looked at.
It isn’t just the public markets that love SaaS companies. M&A has also been hot with Microsoft’s $1bn acquisition of Yammer, Oracle’s $1.9bn acquisition of Taleo and SAP’s $3.4bn acquisition of SuccessFactors standing out as landmark deals.
I know a few of these businesses and they have great products which deliver real value to their customers, combine that with strong growth and you have a recipe for building real value, which is why these companies are attracting such high valuations. That said, it is only when these companies translate revenues into profits that real value is created and until that happens there is more scope for downside than upside for these companies. If the Street does re-rate these companies there will be a knock-on negative effect on the exit environment for their smaller brethren.