Growth Drives Value for SaaS Companies

Software-as-a-Service (SaaS) is hot. White hot. In fact, it’s been hot for several years now. Marketo, which IPO’d recently, now has a market capitalization of $1.23 billion (NASDAQ:MKTO), even after Salesforce.com bought ExactTarget / Pardot. With Marketo’s most recent quarterly revenue results of $22.5 million (extrapolated to $90 million annually), the stock is now trading at north of 13x revenue (not counting assets and liabilities). The big driver of SaaS value is growth and with a 62% growth rate, the market loves Marketo. Is the stock overvalued in the short-term? Absolutely. Long-term? No, as long as it can keep its growth rate up for several more years and withstand Salesforce.com’s entrance into the market.

Now, let’s look at NetSuite. NetSuite is at its all-time high with a market capitalization of $7.35 billion (NYSE:N). Based on last quarter’s revenue of $101 million, extrapolated to $404 million annually, the stock is trading at north of 18x revenue (not counting assets and liabilities). Take out a few turns of the multiple for the Oracle premium on NetSuite, and you still have a massive multiple. What gives? NetSuite grew 35% year-over-year and shows no signs of slowing down. The markets love growth.

As long as the leading SaaS companies continue to post impressive growth rates, look for a market premium unlike many other industries. SaaS entrepreneurs take note: growth rates drive valuation.

What else? How long do you think the leading SaaS companies will continue to get a large premium for growth?

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