Why software ratings could keep falling if things don’t change soon – TechCrunch

startups have seen better years. Last year for example.

We’ve been working to highlight good news where possible (signs of robust software revenue growth, signs that valuations may be partially recovering, and that a good number of startups have oodles of cash on hand), but today we’re working on the opposite direction .

A good question to ask today is whether tech stocks, particularly software company stocks, are selling too fast. If this is the case, we could expect their sales multiples in the public markets to increase over time. For tech startups being compared to their public counterparts, that would be a huge relief.

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There is reason to believe that this could happen. Altimeter Capital partner Jamin Ball, whom we consider a volunteer data journalist, wrote earlier this week that the “median software multiplier is now 5.7x,” which is “nearly 30% below the pre-COVID long-term average for the cloud software universe.” (Note that this week Mary D’Onofrio and Andrew Schmitt of Bessemer Venture Partners achieved a 6.6x median ARR multiple for public cloud companies, which is close enough to add weight to Ball’s math.)

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If you think cloud and software stocks shouldn’t be trading below their historical averages, then you have reason to be happy. But is that a valid perspective? Should we expect cloud and software stocks to trade at a Discount to their pre-COVID sales multiples? let’s find out

The bear case

The Federal Reserve is expected to hike rates sharply today, perhaps by as much as 75 basis points. The rate hike follows a 50 basis point hike in May, the first time the Fed has hiked rates by that much in 22 years. Not only is the Fed raising interest rates — the price of money — it is also lowering its entire asset base.

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Rising interest rates are generally expected to be inversely correlated with the value of high-priced assets, including stocks that have been trading at above-average earnings multiples. That means technology and software stocks. There were several reasons for the huge increase in the value of software revenue over the past year, but its decline and the resulting market hangover are inversely related to the price of money, which is about to rise. Again.

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