SaaS Cream or Froth

SaaS today: Is that the Froth or Cream of Tech?

Technology stocks have had a great run over past 3 years since their Feb 2016 bottom.

More so, a certain subset of tech stocks (SaaS businesses) have had an even better run. Below I share a chart I came across on Medium by Alex Clayton. blogger. It feels like an almost indiscriminate re-rating of SaaS back to 2013 highs. While the SaaS business models are more mature today, they are surely not growing as fast as in 2013.

Moreover, it is a bit scary to see almost half of these businesses are priced at over 10x sales. This subset of businesses should be the risky part of the market where innovation is rampant and the incumbents can neutralize them. A 10x multiple however suggests a pretty high chance of success. While surely some of them will succeed, but it is unlikely that half of them will.

P/S multiple on a basket of SaaS stocks

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