Tech Chat – January 2021

Size matters

This week our Tech analyst looks at the implication of the virtuous circle of valuations with scale as applied to stock screening.

School records from my alma mater show how in the last 500 years, history has repeated itself and pandemics are not that rare: back when life was obviously more challenging, the boys were sent home in 1575, and then in 1630 due to smallpox; 1637 again because of the plague (but were kept at school in the Great Plague in 1665); but even in the 20th century, all bar 20 of the school members got Spanish flu in 1918; 1928 saw the school close with Scarlet Fever; several died of polio in the 40s and 50s but the school remained open during sporadic but repeated local outbreaks; in 1957 65% of pupils caught “Asian flu”. Even so, the school has benefited from recurring revenue from pupils for 1,423 years. 

The school was founded by Saint Augustine in 597AD, but amazingly, a Japanese company called Kongo Gumi beats the school’s achievement for longevity: founded in 578AD, it constructed Buddhist temples, in wood, in doing so creating a recurring revenue stream (with replacement every 60-100 years or so) of over 1,450 years. While no longer independent, it still benefits from perpetual repeating demand. While religion is not one of the words in our mantra that “death, taxes, and regulation are the three certainties in life”, religion as the opium of the people leaves the temple carpenter confident. 

In today’s listed company valuation environment, recurring revenue certainty has flowed through into sales multiples where longevity of revenue is assumed and scale is everything. 

The table (compiled by finnCap Cavendish to show global SaaS valuations) shows the virtuous circle of valuations with scale, with the aberration that currently the £50m-£100m companies have a lower rating than the smallest, despite greater critical mass in their ARR. Most notable is the breakthrough uplift gained from moving into the £100m+ range (admittedly a wider band) but true form that once a company valuation exceeds £100m it becomes interesting to a broader pool of investors. I remember the comment one fund manager gave me about a stock: “give me a ring when it’s more expensive”, since his investment committee wouldn’t look at it below £100m, but even with no change to forecasts they would consider it above £100m, at higher multiples. 

With that approach, there must be some screening to be done for companies in the current £70m-£100m range, where lift off is imminent: try Essensys; Access Intelligence (demo here); Quixant; Bigblu Broadband; Attraqt; Sopheon; Aferian. Thank me later. While not all of them are SaaS or traditional ARR, but they each have loyal customer bases – and although their customers are not Buddhist temples needing rebuilding every 70 years, they come back every year, and in increasing numbers for more – in a pandemic free environment. All, notably, play to post COVID opportunities for digital transformation, justifying further that they are primed to deliver benefits to customers and shareholders as the vaccines roll out and COVID goes the way of smallpox and polio. Right size, right products, right time. Call us if you want meetings.

Happy Friday