Jason M. LemkinCEO, SaaStr · Co-Founder of SaaStr AI, SaaStr Fund, Adobe Sign

The changing dynamics of market valuation: Growth vs profitability

15 Oct 2023 · 1 min

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0:58

YouTube video (Jason M. Lemkin, Oct 15, 2023) discussing a shift in public market valuation sentiment from peak 2021 bull-market priorities toward a more balanced trade-off between revenue growth and free cash flow (FCF) margin—especially for private cloud companies. The speaker offers a simple heuristic: at the end of 2021, a 1% improvement in revenue growth moved valuations equivalently to a 6% improvement in FCF margin; by the present (video date) the ratio has narrowed to roughly 2:1 (1% revenue ≈ 2% FCF impact), indicating profitability is being rewarded more than during peak exuberance.

Questions this video answers

A 1% improvement in revenue growth had the same impact on valuations as a 6% improvement in free cash flow margin.

Approximately a 2:1 ratio: a 1% improvement in revenue growth has the same impact on cloud valuations as a 2% improvement in free cash flow margin.

Chapters

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 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 to 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 impacted the best of private cloud.