It's All Priced In
It's All Priced In
9/22/24 Benchmarks for Operators
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It’s All Priced In
It was a very happy “Fed Rate Cut Day”, for those who celebrated. The scissors, as expected, came out.
And with that, I come bearing your recurring reminder that whatever you think, is already priced in (I call it “The Ratchet Version of the Efficient Market Hypothesis”).
summed the recent events up well:“It finally happened! The Fed cut rates by 50bps. This represents the first rate cut since the start of the Covid pandemic, and one that has been highly anticipated. There was a little debate on if this cut would be 25bps or 50bps, but we ended up with 50bps. The target fed funds rate now has a range of 4.75% to 5%. The 10Y didn’t change at all, in fact it was slightly up (3.68% last week to 3.72% as of this writing). This goes to show the rate cut was no surprise to the market.”
The takeaway here: The most important interest rate in the country isn't the fed funds rate, which was lowered Wednesday to below 5%, but rather the yield on the 10-year Treasury note, which rose slightly from Tuesday to Wednesday.
For those keeping notes at home, the cost of money is priced off of the 10 year Treasury Note. And given its movement (or lack thereof), it means future rate cuts have always been priced in — and that mortgage rates won't necessarily fall further just because the Fed is now in cutting mode (Source: Axios).
Like many of you, I’m learning a lot about our mysterious economic engine in real time. And that’s wearing my duel hats as a CFO + guy with a prohibitively high mortgage rate.
I called a few of my friends to see if they’d be refinancing (personal or business debt) and the “It’s already priced” in memes started flying off the shelf.
“There was an analyst i used to work with that would begin almost every note he wrote with "we're not surprised to see ..." even if it was the most unknown thing imaginable. And it became a running joke that he knew all of everything that would happen because it was already priced in.”
-Equity Analyst Friend
So, is December’s rate cut already priced in? Most think another 50 bps will come off the top.
Most likely, yes.
The market has a way of digesting expectations well in advance, leaving little room for surprise. But just because it’s priced in doesn’t mean it won’t still have ripple effects—whether in how companies manage debt or how we navigate our own financial decisions.
And for those hoping the next cut will bring relief, remember: sometimes what’s ‘priced in’ still feels expensive.
TL;DR: Multiples are UP week-over-week.
Top 10 Medians:
EV / NTM Revenue = 14.0x (+0.8x w/w)
CAC Payback = 17 months (+ 1 month w/w)
Rule of 40 = 51%
Revenue per Employee = $502K (-$40K w/w)
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 109
Population Sizes:
Security: 17
Database and Infra: 14
Backoffice: 15
Marcom: 16
Marketplace: 15
Fintech: 16
Vertical SaaS: 16
If you’d like the company level metrics used in these reports, upgrade to paid and you can download the excel sheet at the bottom of this post
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 online, 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.
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