SaaS Company Valuations Will be Cut in Half

David Cummings on Startups

Earlier today Jason Lemkin tweeted that a 50-70% correction is coming to Software-as-a-Service (SaaS) companies:

I agree.

Last week Fred Wilson wrote a post The Bubble Question about it where he attributes overvalued tech stocks to interest rates near zero and the desire for growth companies.

Today, many SaaS companies are trading at 10-12x trailing twelve months revenue, and have no profits. So, why do I think they’re 50% overvalued? Easy. SaaS companies typically spend 40-60% of revenues on sales and marketing to acquire customers (growth is incredibly important). Assuming these sales and marketing costs could be pared back relatively quickly, the theory goes that these companies would quickly achieve 30-40% profit margins.

The average historical price to earnings (PE) ratio is around 15 for a…

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