Velpic in SaaS Market Analysis, page-3

Hi TLP, thanks for the excellent analysis. I have a couple of comments:

Firstly, I would say that the curves for 1PG and RFN show a downward trend because of the speculative bubble those stocks experienced. I think your point is that the extrapolation of those curves will show their true or underlying EV/fwd revenue valuation, once the "excitement" has died out of the share price.

The 2 stocks with the lower multiples (1.2x and 0.7x) on the other hand are not converging to 3.2x - to do so they would be trending upwards, but they are trending lower - my guess without knowing who they are is they are tech stocks that gained some "sector" premium last year when the 1PG and RFN SP's were exploding.

That leaves us with a sector where the EV/fwd revenue valuation is declining (all 5 curves are declining) atm, and currently the valuation could be anywhere between 0.7x & 4.7x - and my guess is where an individual company sits in that range will depend on actual growth performance.

While the saas business model is a high margin model and so you would expect a high multiple, I think the market tends to discount heavily until the runs are on the board, and then the market will re-rate heavily (i.e. overcompensate and spike) when actual performance is delivered. But if that is the case then my view is that sentiment still contributes the lion's share of the EV multiple - i.e. the SP will rerate because sentiment drives the SP up exponentially, not because the revenue has gone exponential. The way you can tell this is if you look at any stock curve like 1PG, the price has gone exponential in between earnings reports - so how could earnings or revenue projections have driven the price up so quickly? The answer is it hasn't its gone up because of sentiment that snowballs, often initiated by one or a few news events in quick succession (one of which could be an earnings update).

Does that mean VPC won't rerate? Not at all I'm not saying that. I think VPC earnings will grow and it will be successful, and this will take time and the valuation in the absence of any sentiment will go up slowly in accordance with earnings. However the SP will rerate much faster when some news trigger excites the market. Is that a bad thing? Absolutely not, I'll take a sentiment-driven SP increase any day if I can get it, because it happens quicker, but true valuation appreciation is also good I would just have to be more patient.

Cheers, Sharks.