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April 2020

Peak Valuation?

It seems kind of crazy, but the tech industry seems to have achieved historic high valuations. A buddy of mine talked about the 100 club --software companies with 100x revenue valuations. Historically, SaaS companies have traded between 7-14x, with a few outliers like Salesforce beyond that. Now it seems many companies are trading at 25x, 50x and, you guessed it, outliers are at 100x! 

I can understand investor enthusiasm. When you see the robust growth from longstanding SaaS companies like Zendesk, Hubspot, Twilio, Shopify and younger companies like DataDog, Elastic and MongoDB it can appear that there's a magical combination of SaaS, developer tools and open source that will seemingly grow forever. Likely IPO candidates Gitlab and Databricks are doing just that. Many of these high-growth companies have been part of an overall platform shift to the cloud. With accelerated cloud adoption during 2020's covid quarantine, you might think there's no downside. 

But these companies are exceptional. As a reminder there's a crop of former high-flyers like Box and Cloudera that have seen their valuations come back down to earth after posting tepid growth. It's a good reminder that not every company that VCs invest is exceptional. Investors (and founders) should keep that in mind.

Hopefully whatever corrections happen are minor and we revert to healthy, rather than historic-high valuations.

What do you think? Are tech stocks overpriced?  Post a comment below.