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If you’re a financial accounting purist, the avalanche of measures that internet and cloud computing companies have devised to assess their businesses will irritate you. Bill Gurley, a venture investor, wrote a foresighted blog article in 1998 regarding the dangers of utilizing other performance indicators. He even warned about the perils of utilizing the now-standard price-to-earnings ratio back then. According to Gurley, “any financial academician will tell you that the only right approach to value a stock is to estimate a company’s long-term cash flows, discount those cash flows back to the future, and then divide by the number of shares.”
He was particularly enraged by price-to-sales multiples. Gurley noticed that selling dollar bills for 85 cents may bring him a lot of money. Given how tech stocks fell over the next two years, Gurley’s warning proved prophetic. Despite this, the complicated measures remained. The price-to-sales multiple now appears to be antiquated. Cloud organizations that are rapidly expanding have moved on to more complicated measures. Traditional metrics still important, as evidenced by the recent selloff of high-priced cloud names. But I don’t think the wacky measures will go away anytime soon. When earnings season returns next month, we’ll hear a lot about adjusted metrics. Let’s define some terminology to help you comprehend what’s going on: ARR stands for annual recurring revenue. The majority of cloud firms rely on subscriptions to generate revenue over time. Monthly recurring income is multiplied by 12 in ARR. Companies that mix subscription income with term-based contracts, which normally record revenue up front, will benefit from this metric. This is especially true for businesses that are transitioning to subscriptions. In this week’s Splunk feature, you can witness an extreme example of that transition (see page 12). Its sales growth for 2020 was down, while its ARR was up roughly 40%. Deferred revenue (money received but not yet recognized under conventional accounting rules) and backlog make up remaining performance obligations (RPO).
Salesforce.com
CRM (ticker: CRM) and CRM (ticker: CRM)
ServiceNow
Report cRPO, or current RPO, the fraction that will be recognized within the next 12 months (NOW). Consider this metric as contract work that may or may not be recognized or completed—a it’s predictor of future financial performance. The net retention rate (NRR) is a metric that tracks the change in revenue per client over time. It’s similar to merchants’ same-store sales, but with customers replacing storefronts. The company’s high NRR—168 percent in the January 2021 quarter—is one of investors’ favorite aspects of the Snowflake (SNOW) tale. The implication is that current customers desire to use the company’s services more frequently. Contribution: Before considering fixed costs, this metric examines whether specific transactions are profitable.
Lyft
Contribution is defined by (LYFT) as revenue minus cost of revenue, omitting a large range of items, including stock-based compensation. The “take rate,” which is the portion of transaction income left over after paying third parties such as drivers or, in the instance of food delivery, restaurants, is a related concept. Adjusted Ebitda is a spin-off of EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. Stock-based compensation and other one-time items are not included in the adjustments. Both
Uber Technologies is a company that provides transportation services.
(UBER) and Lyft have stated that on an adjusted Ebitda basis, they anticipate to be profitable this year. TAM (total addressable market): TAMs have been popular in the market, particularly during initial public offerings. Consider the following example: According to my research, there are 1.3 billion English readers globally. Recent viewership of my post has been significantly lower, presenting Tech Trader with a significant untapped TAM. Perhaps I should speak with some SPACs. I wrote a piece in July on a Nasdaq-listed business development firm named
SuRo Capital is a venture capital firm based in New York
(SSSS) is a fund that invests in tech stocks before they go public. SuRo had invested 19 percent of its assets in the data analytics firm at the time.
Palantir Technologies (Palantir) is a company that
(PLTR). Palantir’s direct listing was a windfall for SuRo, resulting in a $120 million profit; SuRo shares has since surged 55%. Don’t worry if you missed it. It’s possible that history will repeat itself. Coursera, an online education startup that just filed for an initial public offering, is now SuRo’s largest asset. According to SuRo CEO Mark Klein, the share was worth $53 million at the end of the year, based on Coursera’s most recent private valuation of $2.5 billion. Coursera expects $293.5 million in sales in 2020, up 59 percent from 2019. Revenues would reach $450 million in 2021 if revenue grew at the same rate. The shares would be worth $4.5 billion if it were valued at 10 times forecast sales, bringing SuRo’s holding to $93 million. However, this may turn out to be conservative.
Chegg
The most obvious publicly traded analog to Coursera is (CHGG), which trades for 16 times revenues. Coursera would be worth $7.2 billion at that multiple, and SuRo’s stock would be worth more than $150 million. Eric J. Savitz can be reached at eric.savitz@barrons.com.
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