Hey, I'm Dan! I invest in startups at Madrona and write the DL, a weekly newsletter about tech in the Pacific Northwest

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What's Next for Software Multiples?

Morgan Stanley published an interesting report last week on valuation multiples for software companies and why they are at decade highs. Their take was that software stocks are up 50%+ YTD, but for good reasons:

  • Interest rates have gone down
  • Subscription revenue has continued to grow despite the crisis
  • Lower growth and lower T&E have improved margins
  • Customers are increasing investments in digital transformation


However, they also say that it will be tough for multiples to continue expanding based on these secular trends, so now they are focusing on companies in a handful of categories where they still see opportunity:

  1. Businesses with consumption-based models - Microsoft (Azure), MongoDB, and Twilio can still outperform because their growth is based on usage, not just contract renewals
  2. Companies that were impacted by 2020 demand issues - Companies like Intuit and Smartsheet will have more room to outperform in 2021 as small businesses “snap back”
  3. Companies with a fundamental change in demand - While Zoom’s “change in demand” is already priced in, companies like Docusign and Veeva might still be underappreciated
  4. Business model transitions - Companies like Atlassian, Nuance, and Sailpoint are moving more and more customers to the cloud, which should improve their financials over the next few years


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