Overview
As per the title, I’m trying something new here and presenting a model I’ve created this year. My goal was to make a model very simple to the point in key parameters and inputs and outputs, where it revolves around two-year forward exit EBITDA and Gross Profit multiples.
I used this way of modeling using exit multiples (you truly can model off any parameter) due to the accessibility of analyst forward EBITDA projections and think it can give me enough of a picture for what I’m trying to accomplish. I’m firmly in the less is more camp when making forward projections.
This goes over mostly software companies, but also includes a small amount of other categories such as fintech, ecommerce and platform, totaling to 58 total companies modeled for 3-year forward returns and Dec 31 2024 price targets.
Using a shorter timeline than other models might, I’m using three scenarios with different company execution in future growth and profitability, across two different types of exit multiples, totaling out to 6 total scenarios for each company.
In this model all but 2 years of actual estimates from analysts, coming from my favorite source Koyfin. Even still using that small of user input for growth, who knows what’s going to happen and I tried to be as reasonable as possible (while still being a software optimist).
If I were to critique my model anywhere it would be to have lower exit multiples, but I also think some companies included could easily beat the revenue and margin inputs I’ve attached.
How I look at these results is being able to contextualize certain levels to be keen to, as you’d be surprised at how the best result will be a company’s previous high given some pretty rosy scenarios attachments still.
The astonishing part is the range of outcomes some of these high growth companies have ranging from negative returns to 40%+ IRR in their best scenario. Because of that, I summarized the average IRR and also their standard deviation, and I think you need to put equal weighting on a companies best outcome versus their worst.
As always, when viewing any of the spreadsheets I share, I highly recommend viewing on an iPad or computer at 75% zoom. At some point I’ll post a link to the templates to download.
Theme of the newsletter:
Key Assumptions and Inputs
I’ve included all of the headers used in the model for each scenario, but shown is only for the EBITDA exit multiple portion. If there was a couple main things to be mindful of while viewing is share count dilution isn’t considered and then the obvious: this is not investment advice.
I hope sharing this model is received as just a thought generator, and at the end of the day you can tweak these models to get the outcome you really desire. I tried to be honest with my forward projections and inputs, and I’m completely open to any challenges.
As mentioned in the overview, all of the above is non-user input information from Koyfin.
Base Case
Here was have our first set of key parameters I input, starting with 2025 & 2026 Growth, 2026 EBITDA Margin and Exit T+2 EBITDA Multiple (the final input is used for bull case).
Simple base case output return of revenue CAGR, exit market cap, exit share price, IRR and total gain.
Bear Case
Bear case comes from a step back in revenue execution, which I set for 5% for non-mature companies, and 2.5% for mature companies. In the EBITDA model, there is also the layer of a different EBITDA margin than in base case. The rest of headers are the same simple output returns from base case.
Bull Case
Bull case is built off of the last parameter shown in base case section, Historic Estimate Beat %. This means how much a company beats analyst expectations each year, where it is set to either 5%, 7.5%, 10% or 12.5%.
Results
Summary
I’ll be highlighting the top ten companies with the best outcome in different categories and scenarios.
I’ll first include the full data in two images:
Top 10 highest average IRR:
Top 10 lowest average IRR:
Top 10 highest standard deviation:
Top 10 lowest standard deviation:
Positive EBITDA bear case IRR, EBITDA base case above 20%, sorted by average IRR:
Positive EBITDA bear case IRR, EBITDA base case above 15%, standard deviation below 15%, sorted by average IRR:
Bear Case
Top 10 by EBITDA exit multiple:
Top 10 by gross profit exit multiple:
Base Case
Top 10 by EBITDA exit multiple:
Top 10 by gross profit exit multiple:
Bull Case
Top 10 by EBITDA exit multiple:
Top 10 by gross profit exit multiple:
Concluding Thoughts
If you couldn’t tell there were themes throughout of companies that showed up quite frequently in either a positive or negative manner.
Positive
Zendesk
SoFi
HubSpot
Freshworks
Meta
This model output actually made me look into Zendesk much further and pushed me over the edge to invest! It also reinforced my bullish thoughts on HubSpot and Freshworks, and hard to not be impressed with SoFi’s results — which does make sense given it’s back down almost to it’s SPAC deal price. Meta after their big selloff seems to have a nice outlook of returns if they can hit their projections, and Fiverr would be my honorable mention for nice looking potential outlook.
Negative
GitLab
Splunk
Elastic
Sprinklr
Apple
While GitLab having poor results not being all that surprising to me, I was surprised that Elastic, Splunk, and Sprinklr all had pretty lousy expected returns. Apple has always stuck me as overvalued, and even more so after their great 2021 so this was an negative output I could agree with.
This was quite a large scope for looking at potential returns and I tried to show the variation as much as possible to provide the best context to the numbers.
I hope you also took a look at the spreadsheet linked above and had a couple new investment ideas spawn or you saw something that pushed you over the edge to begin your DD process.
For the returning readers: please view from the website instead of inside email as I will be updating the images every two weeks as we work through earnings season!
My next newsletter will be the first of a modified version of my deep dives moving forward, which I’ll be calling overviews. The upcoming overview will be on Freshworks, the 2021 IPO in the SaaS applications space.
- Sean
Q1 2022: My Attempted Model
Great analysis..I like Sofi. Not convinced on Hubs as too much of insider selling.