The changing dynamics of market valuation: Growth vs profitability

Name: The changing dynamics of market valuation: Growth vs profitability
Uploaded: 2023-10-15T14:25:58+00:00
Duration: 57 s
Channel: Jason M. Lemkin
Description: In this presentation, the speaker examines how public market valuation sentiment for cloud companies has evolved from the peak bull market of late 2021…

15 Oct 2023 · 1 min

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In this presentation, the speaker examines how public market valuation sentiment for cloud companies has evolved from the peak bull market of late 2021 to the present. During the 2021 exuberance, a 1% increase in revenue growth was valued equivalently to a 6% increase in free cash flow margin, indicating a strong bias toward growth. The speaker introduces a heuristic to quantify this shift, noting that today the ratio has moved to roughly 2:1— a 1% rise in revenue growth now matches a 2% rise in free cash flow margin. While growth still commands a premium, the market has become more balanced, and profitability improvements are increasingly rewarded. The speaker also highlights that macroeconomic factors have impacted even the best-performing private cloud firms, underscoring the broader relevance of this valuation shift.

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Just as companies adapted, the market has also responded to the paradigm shift, and efforts to drive profitability are not going unnoticed and in fact are being rewarded. So let's put this into a heuristic to contextualize how the public market valuation sentiment has changed. At peak bull market exuberance— so this was the end of 2021— a 1% improvement in revenue growth had the same impact on valuations as a 6% improvement in free cash flow margin. Today, this ratio is closer to 2:1, still in favor of growth, but certainly a bit more balanced from what we saw in the bull market years. And so today, a 1% improvement in revenue growth has the same impact on cloud valuations as a 2% improvement in free cash flow margin. But nonetheless, it points to the fact that the macro has impa— has impacted the best of private cloud.