There are many factors that can affect a company’s revenue multiple and ultimately its stock price, but we’ll focus on the 3 biggest ones that affect software companies 🌐

1️⃣ General market conditions.

In bull markets, multiples tend to be higher, and in bear markets they tend to be lower – regardless of companies’ fundamentals. 📈

In the bull market of 2021, the average software company had a market cap that was 20x its NTM revenue, but as of January 2024, the average software revenue multiple is 6.6x.

This means that a company projecting $1B in NTM revenue may have been worth $20B in 2021 but only $6.6B in 2024 – a 67% decrease in value! 💥

2️⃣ Gross Margin 💰

All things being equal, a company with 90% Gross Margin gets a higher revenue multiple than a company with 50% Gross Margin.

Companies with higher Gross Margins have more money from their revenue that can potentially become real profit, and so their revenue is “worth more” than companies with lower Gross Margins.

3️⃣ Growth Rate 🚀

Companies that are growing faster typically trade at higher revenue multiples, as investors are paying for future potential.

Imagine you’re choosing one out of two companies to invest in (at the same valuation):

Company A with $1B in revenue growing 50% annually

Company B with $1B in revenue growing 100% annually

Of course you’d pick Company B, because it’ll make more money next year than Company A ($2B vs. $1.5B).

That’s why higher growth can get higher revenue multiples today 😎

Keep in mind that there are many other things like market size, competitive position, and scalability that also influence a company's revenue multiple, but we won’t get into them in this journey. 📐