E2147 Debrief
SaaS multiple relationship to changes in interest rates
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Tech Topic: SaaS Correlations to Interest Rates
Today we talked a bit about the impact on interest rates on stocks in general, and SaaS businesses specifically. Higher interest rates reduce the value of future cash flows. Many SaaS companies generate low, or even negative, levels of free cash flow. As a result, one would think that SaaS businesses would be particularly susceptible to changes in long term interest rates - namely, we would expect to see a negative relationship monthly change in SaaS Multiple vs monthly change in the 10 year treasury rate. Market movements related to the changes in the 10 year US treasury rate have historically not been very correlated (in fact, slightly positive) as you can see from the charts below.
If you run a regression on these figures, going back to 2012, you will find that changes in interest rates have a small but significant impact on explaining changes in SaaS multiples. However, starting in 2021, the correlation has become extremely negatively correlated.
In the 4.21.21 edition of Clouded Judgement, Jamin Ball observed…
Over long periods of time the 10 Year Treasury and cloud multiples aren’t very correlated. However, there are times of extreme correlation. Since cloud multiples peaked in February the correlation between the 10 Year and cloud multiples is -0.95. This level of correlation is extremely high. Some attribute the start of the correlation to the point in time when the 10 Year started to maintain (and grow) above 1%. Even in the last 2 days you can see the 10 Year dip a bit, and multiples come back up
Whatever the cause, we are seeing extreme negative correlation this year.
Tech Topic: ConstitutionDAO FAIL
So last week I referenced the the crypto consortium of of ‘investors’ (err.. donors) that were building a DAO (Decentralized Autonomous Organization) to attempt to buy the a rare, original copy of the US Constitution.
Unfortunately for the DAO’s supporters, the DAO lost the auction in spite of raising ~$40 million dollars, twice what Sothebys expected the artifact to sell for.
I thought this would be a great opportunity to learn a bit about web3, unfortunately I quickly realized that gas fees would eat up all of my intended contribution ($50) and eliminate any possible redemption.
Doug Clinton, investors at Loup Ventures and author of the Uncomfortable Profit blog provides an overview as to why they lost - hint, it wasn’t because they didn’t raise enough money.
Supplemental Data
Supercompounders
Energy Data
Macro
Tech
Semiconductors
Semiconductor Industry Association Global Billings Report
Bureau of Economic Analysis Semiconductor Import / Export
Cryptocurrency
Cloud Multiples
Check out the most recent edition of Clouded Judgement for the latest SaaS multiples. Also, this week Ball covers the topic of growth durability - long story short - best in class SaaS companies are seeing long term durable growth at higher rates than ever before.
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