News: SKF Skyfii Posts Full Year Total Operating Revenue Up 52%, page-13

"I'd be interested to get your thinking on the Price-to-Recurring-Revenue metric. At a multiple of 8.0, what peers do you benchmark this against to form the opinion that this metric is high?
I've found it challenging to benchmark SKF against typical tech and when them comparing with companies operating under a similar service offering, I find SKF is low."

@capt.sardine.tin and @Matt48,

Apologies for the delayed response but I missed your posts.

Like you both, I found it quite tricky to obtain a decent sample of comparator stocks for SKF.

For starters, there are a great many different economic sectors in which these SAAS company's operate. Then, there is the issue of varying market caps and degree of profitability (and there is not much correlation between market cap and profitability... some small cap stocks are breaking even, and some companies with meaningful market caps are making big losses).

For what its worth (and that isn't very much, I don't think) below is a crude little database I maintain in attempt to derive some relative valuation clues for these kinds of immature SaaS businesses, which shows SKF situated around the middle of the pack:


But, as I said, I'm not sure that "pack" is all that representative, which renders the exercise a bit moot, I think.

Instead, the way I prefer to look at it is from a fundamental valuation basis, namely along the lines that I think this business, if it continues to execute and maintain traction as it has been doing over the past 2 years, has the capacity to be generating Revenues in excess of $30m, and probably even $35m within the next 3 or 4 years.

Even if the cost base needs to continue to expand meaningfully to $20m (cf. $14m today), that would still result in an EBITDA run-rate of around $12m to $13m.

Capitalising that level of EBITDA at a conservative multiple of 15x (conservative for a SaaS business, that is), it results in a company valued at around $180m (which is almost four times higher than the current value).

Low road scenario is that Revenue stalls at $20m, in which case the cost base would be kept in check accordingly, to say $15m, for EBITDA of $5m . To reflect the slower rate of growth associated with this scenario, the valuation multiple will be more muted, to say 10x to 12x, implying a valuation of $50m or $60m, which are still above, or at least equivalent, to the current market value of the business.

So, while it is difficult to nail down company valuations at the best of times, with this sort of rapidly growing, but still-unprofitable business, it becomes an order of magnitude more difficult.

But a few ready reckoner calculations suggest to me that the share price downside is somewhat limited, and this is more so as the top line keeps growing organically.

Of course, risk management and sell discipline are important in these kinds of situations.

So portfolio positioning should never be too punchy and at the very first sign of loss of organic revenue momentum, the sell button needs to be invoked. But nothing in this latest update makes me want to do anything of the sort.

.