Iced Coffee is Expensive
12/22/24 Benchmarks for Operators
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Both Palantir and iced coffee are trading at 50x right now.
Seriously, I got off the plane at JFK and it was $6.26 for a lahge dunkin iced coffee.
Five years ago, that same coffee was $2.95. That’s a 112% increase, or 16% CAGR.
Like at what point do we hit the maximum bounds of supply-demand elasticity for caffeinated drinks?
While I’m no economist, I think we are living in Banana Land.
So naturally, I asked a smart guy with an econ degree to put the Fed’s recent cut into Super Simple CJ Terms (SSCT) for me:
“Post cut the 10 year yield moved UP ~20 bps.
(CJ speak: Opposite of what you’d expect. And, unfortunately, that’s what my mortgage rate is linked to)
Suggests the market believes rates need to be higher for longer and does not think the fed has inflation under control.
(CJ speak: Inflation is still ripping people’s faces off)
Futures markets have taken out 1 cut from next year's bets and now expect the Fed to only cut once in 2025. Stocks spanked because higher rates for longer.”
(CJ speak: There will be fewer rate cuts next year. And this keeps discount rates higher in DCF models. Which makes riskier stuff less attractive.)
TL;DR: The real story is not so much that they cut by 25 bps but that they signaled there wouldn’t be as many cuts next year. In reality, this week’s cut was immaterial to the story. It was 99.8% baked they would cut by 25 bps. It’s all about what won’t happen next year.
It's 50 bps fewer cuts next year…
50 bps fewer cuts in 2026…
And a terminal Federal Funds rate 10 bps higher
Plus higher inflation expectations over the next 2 years that mattered.
Or, as my friend without an Econ degree so eloquently summarized:
“Fed tells struggling home buyers to go fuck themselves.
Promises to cut rates once they get laid off”
OK, so here’s why it matters, especially for operators:
Valuations stay under pressure. With fewer cuts on the horizon, discount rates in DCF models will stay high, making it harder to pump valuations up.
Private capital stays tight. Higher-for-longer rates mean venture funding remains selective, and PE firms demand higher IRRs to justify deals.
Demand-side risks persist. Elevated rates keep corporate budgets tight. Expect SaaS deal cycles to stay sluggish and procurement teams to remain ruthless.
While JPOW clearly doesn’t drink iced coffee, perhaps Big Coffee is onto something—raise prices, blame inflation, and call it margin expansion.
TL;DR: Multiples are UP week-over-week.
Top 10 Medians:
EV / NTM Revenue = 17.0x (+0.2x w/w)
CAC Payback = 27 months
Rule of 40 = 53%
Revenue per Employee = $467K
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 110
Population Sizes:
Security: 17
Database and Infra: 14
Backoffice: 16
Marcom: 16
Marketplace: 15
Fintech: 16
Vertical SaaS: 16
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.
Here’s how I do it:
Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.
Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).
Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, infrastructure to host your business in the cloud, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools.
Research & Development: Product and Engineering employees, development expenses, tools.
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead.”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
Love your content CJ!
The Fed’s strategy: fight inflation. Coffee’s strategy: be inflation
Interesting read CJ. Curious about the Database and Infra valuation (46x). What companies are included are the top ones within that category? Snowflake? Databricks?