A look inside tech valuations and our 3 best ideas

Have you considered the difference in valuations between public and private technology companies?

It would be fair to argue that, on average, private company valuations should be less than public company valuations due to private companies being less liquid and arguably less proven than publicly listed companies.

That being said, the amount of capital available to invest in multiple capital raising rounds to support growth of private companies has likely never been higher. As such, private companies can stay private for longer and are now more sophisticated and advanced than many private companies that have come before them. With more companies now more than ever being born-in-the-cloud, understanding private company valuations can provide some insight into public company valuations.

So in this report, we review a recent survey of private, Cloud companies and compare the current average valuation of those companies to some listed Australian cloud companies, then summarise our key findings.

How the 2021 ‘Cloud 100’ List Valuations Compare to Australian Listed Technology Stocks

Bessemer Venture Partners (“BVP”) is one of the world’s leading Software-as-a-Service (“SaaS”)-focused venture capital firms. BVP, in conjunction with Forbes and Salesforce Ventures, published an annual list of the top 100 global, private cloud computing (“Cloud”) companies in a list called the Cloud 100. 2021 is the 6th annual edition of the Cloud 100 and in this report we summarise the key takeaways from the Cloud 100 report. We also compare one specific valuation metric (Market Cap/ARR) to some of our coverage universe.

Four Key Insights from Cloud 100

1. Two Australian-Headquartered Companies Feature: Two Australian companies feature, almost being the book-ends of the list. Design software firm Canva came in at #3 (2020: #7, 2017: #100) with a valuation of US$15bn after raising a total of US$360m (excluding a subsequent raising). Employee experience platform company CultureAmp ranked #99 with a valuation of US$1.5bn after raising a total of US$258m. Airwallex has moved its headquarters from Australia to China so is no longer attributed to Australia, but out of interest, Airwallex ranked #58 with a valuation of US$2.6bn having raised a total of US$502m (also excluding its subsequent raising).

2. Annualised Recurring Revenue (“ARR”) Valuation Multiples Have Expanded Materially: The average ARR valuation multiple (specifically: Market Cap/ARR) for the 2021 Cloud 100 list was 34x, with the median being 27x. The average ARR multiple in 2021 of 34x is +48% higher than 2020 (23x) and more than double (+162% higher than) 2019 (13x).

Source: Bessemer Venture Partners, Cloud 100 2021

If we compare this median multiple of 27x to our relevant stocks under coverage (i.e. high levels of recurring revenue and disclosed ARR), in general, the more proven the business, the greater the multiple. Xero is the clear standout, with its multiple of 23.6 only a -13% discount to the Cloud 100 median of 27x. TechnologyOne multiple of 20.3x is the other stock >20x. The <A$500m market cap companies had multiples <5x.

3. FinTech and Data Infrastructure Dominate: The valuation of the FinTech sector Cloud 100 members was ~25% less than Data Infrastructure in 2019 (~$26bn vs. $37bn), but over the past two years, FinTech valuation of the Cloud 100 members has increased +461% to $146bn and now makes up >25% of the Cloud 100’s cumulative value. Data and infrastructure businesses are in second place, making up $63bn in valuation, up +70% since 2019.

Source: Bessemer Venture Partners, Cloud 100 2021

4. The Threshold to Make the Cloud 100 Continues to Get Higher: While the average valuation of the bottom decile of companies in 2020 was $1bn, 2021 is the first year that ALL 100 companies needed to be unicorns (market cap >$1bn) for inclusion in the Cloud 100 list.

With considerable momentum behind private company valuations and the FinTech and Data Infrastructure sectors leading the tables in valuation creation, we now discuss three Australian listed technology stocks that we currently rate as OverWeight (i.e. as Buys).

Our Best Ideas

We have OverWeight recommendations on three stocks, Nitro Software, Whispir and Damstra.

Nitro

Nitro is an emerging leader in the provision of Workflow and Productivity software across industries. Nitro’s core product, the Nitro Productivity Suite, includes a PDF editing and formatting tool, e-signing, and productivity efficiency analytics, all in a single solution with the United Sates, the company’s core market.

We are very constructive on Nitro and believe that the company is well placed to grow as the pre-existing secular trends of digitisation and digital transformation continue to be accelerated by the pandemic. Over view is that Nitro only needs to participate, not dominate, in the growth in document management and digital signature categories to be genuinely successful.

Our positive view is predicated on the following three elements:

1. Value Proposition

We see Nitro’s value proposition as being:

1. Value – by being priced very competitively compared to higher-priced peer offerings;
2. Scale – by offering customers unlimited volumes on some products compared to peers that have volume caps;
3. One-Stop Shop – by offering good functionality in both document management and digital signatures, compared to the incumbents that have dominant market shares in their respective specialisations (Adobe in Document Management, DocuSign in Digital Signatures) but noticeably less sophistication in those other products.

2. Increasing Revenue Quality

Nitro’s business model remains in transition. Nitro is focusing on its subscription business which is growing strongly from: i) expanding use cases with existing customers; ii) winning new customers; and iii) converting customers from perpetual licences to subscriptions, all of which have been roughly equal contributors. We are forecasting Nitro’s subscription revenues to be 67% of total revenue in FY21, >3x higher than FY18 (21%). More importantly, we are constructive on Nitro being successful in quickly reaching ≥80% of subscriptions via a strategic balance between the ‘carrot and stick’ with customers, but also because of Adobe’s success in recent times in transitioning its business, at scale.

Most importantly, Nitro’s change in revenue mix will not only improve the overall quality of its revenues, but should also increase its group revenue growth rate as the headwind from the contracting perpetual business has an incrementally smaller impact on group revenue growth.

Source: Nitro, Adobe, DocuSign, Wilsons

3. Guidance Momentum

Nitro has provided FY21e guidance (in USD) for ARR ($39m-$42m), Revenue ($47m-$50m) and EBITDA (-$9m to -$11m).

Nitro has since guided to revenue being towards to the top-end of that range and our forecast of $51.5m is +3% above the top-end of that range. Justifying our confidence is the 1H/2H revenue split implied by the guidance. Nitro generated 1H21 revenue of $24.1m and to meet the mid-point of guidance ($48.5m) only requires 2H revenue to be $24.4. While this represents +15% vs. the pcp, it is only +1% vs. 1H21, which seems too conservative with Net Revenue Retention of 114%.

Conclusion

In summary, we expect meaningful price appreciation for Nitro over the coming 12 months, driven by strong revenue growth, increased revenue quality, meeting but likely beating FY21e guidance and the continuation of the global, secular work-from-anywhere trend.

Whispir

Whispir provides a cloud-based communications platform to >500 corporate and public sector customers globally. Their tools connect businesses and people unifying various messaging systems: SMS/MMS, voice, email, web, social media and app alerts on one platform. The product is used for business coordination, customer engagement and crisis management, charged as a Software-as-a-Service (“SaaS”) subscription, supplemented with volume-based revenues.

Our positive view is predicated on the following three elements:

1. Strong 4Q21 ARR – Whispir posted 4Q21 ARR of $m, and while 2H21 revenue was less than expected, the solid ARR figure bodes well for 1Q22e.
2. Capitalising on the US Opportunity – Whispir has both the internal strategic mandate and external financial mandate (following its ~$48m capital raising) to expand its US market presence. The US was only ~3% of group revenue in FY21, but Whispir’s end of FY23e ARR goal of 25%-30% of material and aspirational, and likely >50% of the sentiment towards Whispir today.
3. New CFO ¬– We see the recent announcement of Jenni Pitcher as CFO as constructive and will increase the sophistication of Whisipir’s financial acumen.

Damstra

Damstra develops, sells and implements integrated hardware and SaaS solutions in industries where compliance and safety are paramount. Damstra’s value proposition includes efficient and documented tracking, managing and protection of both staff and contractors alike, enabling employers to manage worker health and safety and meeting incrementally demanding regulation and compliance requirements. Damstra now since fully integrated its acquisition of Vault Intelligence (VLT.AX).

Our positive view is predicated on the following three elements:

1. Expected Contract Announcements: We remain hopeful of positive announcements relating to large contracts, including a new win in the UK, a new win in the US and the expansion in scope of an existing contract.
2. Recovery Trade: We see Damstra partly as a ‘recovery trade’, and expect the share price to rise as the construction and mining sectors alike return to more normalised operations.
3. Undemanding Valuation: Damstra is trading on a FY23e EV/Sales of 3.8x which we see as undemanding. 

Summary

In our view, there is always capital available to fund good businesses.

If the business is private, it will attract initial and likely subsequent funding. If the business is public, then it will attract additional funding.

Lastly, success begets success. So a continually successful business will likely attract multiple rounds of funding and if valuations in private markets exhibit greater multiple expansion than valuations in listed markets, then private markets will be able to attract a greater share of growth capital.

While it might seem counterintuitive for private companies with low liquidity to yield higher valuation multiples, a material uplift in valuations in a relatively short period of time can lead to capital recycling which in turn, supports ongoing investment.

Ultimately, the more good businesses that get funded, the more these high quality businesses will generate solid returns for shareholders, with some even becoming listed, public companies, like Nitro Software.

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