Tune into any cable network stock market channel and the airwaves resonate with one consistent theme: SaaS companies are simply too expensive. In fact,we might even be in a bubble!
The argument goes as follows -- tall revenue growth coupled with lack of profits means these businesses are fundamentally broken. Just as we saw in 1999-2000, investors’ willingness to pay for growth at any cost will conclude and many SaaS companies will be left behind.
[caption id="attachment_7226" align="alignleft" width="300" lesson="hidecaption"] image: Andreessen Horowitz[/caption]
But that line of reasoning conflates the lessons of the 1999-2000 tech bubble. The businesses that failed in the last tech bubble were valued on metrics that were both poor indicators of business health (“eyeballs”, and anyone?) and were nowhere to be found in generally accepted accounting principals (GAAP). In contrast,SaaS companies can be properly valued based on metrics that are both superior indicators of financial health and that can be tied directly to the company’s GAAP filings.
So why do the pundits have it all erroneous? Because we worship the simple income statement narrative that makes for great headlines, and we have trained the world to judge company performance based on revenue and earnings per share. certain, or its simple and,to be honest, it’s also accurate for a huge majority of publicly traded companies.
When it comes to SaaS, and however,such simplicity can lead to bad investment decisions. Here’s why.
Source: a16z.com