PayPal, Twilio, Vimeo: 3 Cashflow Monster in the Making
3 years ago double-digit sales multiples were the norm for SaaS and platform companies. Now, investors can buy some of them for single-digit cash flow multiples.
Hand on heart: Who among you would have thought three years ago - at the height of the pandemic-driven digitalization wave - that a number of cloud software and platform companies would be available for single-digit cash flow multiples in mid-2024?
At the time, double-digit sales multiples were the norm for such stocks. Investors were ecstatic about explosive sales growth, inflated by the era of free capital and the aftermath of the coronavirus pandemic.
Now all these special effects are gone. Capital has a price again. Digitalization has slowed at least a little since the pandemic, and the former growth stars are struggling with stagnating business volumes.
The shares of many of these companies have collapsed, losing a large part of their value over the past three years.
Most of the growth investors who invested in these stocks before the crash are not even looking at them now that sales growth has collapsed. These companies therefore need to attract a whole new set of investors if they are to survive on the stock market in the long term.
The good thing is that good quality SaaS and platform companies can quickly transform themselves from high-growth companies into real cash flow monsters in such a difficult period. Many of the companies I follow and like to invest in are undergoing this transformation and are becoming increasingly attractive to value investors.
For me, the most important profitability indicator when valuing such companies is the development of Free Cashflow per Share. If this figure rises quickly and sustainably, then I am very optimistic about a turnaround for those SaaS stocks and platform companies currently trading at single-digit EV/FCF (explained simply here). Then it should only be a matter of time before they are discovered by value-oriented investors and/or the slowing revenue growth is boosted by new investment.
Want some examples?
Vimeo
I have been invested in the video platform Vimeo for some time now, you can read the Vimeo investment case here. In his first earnings call, the new CEO Philip Moyer was able to present convincing half-year figures with a slight increase in revenues for the first time since many quarters.
Free cash flow in Q2 was almost 20% of revenues, or 20 million USD, meaning that free cash flow per share has more than doubled over the past 12 months. The EV/FCF ratio is 10.
Vimeo is now also profitable on a GAAP basis, with a recent net margin of 10%.
The share price jumped 27% in just two trading sessions after the release of the strong half-year results. However, even at a share price of 4.75 EUR, the enterprise value is only around 500 million USD, which is barely more than one time sales. An EV/Sales ratio of 1 is very unusual for a profitable software company with a gross margin of 78%.
PayPal
The PayPal stock from my sample portfolio shows a similar picture. You can read the recently updated PayPal investment case here.
PayPal's free cashflow per share has also risen by more than 100% over the past 12 months to 6.50 USD. As a result, the EV/FCF ratio has fallen below 10 for the first time, making PayPal shares cheaper than ever.
Twilio
From 2018 to 2020, I had already invested very successfully in the Communications as a Service platform Twilio. It was interesting for me to read now (only in German, sorry) about the investment case at the time and, most importantly, my reasons for exiting.
Twilio's explosive growth was followed by a crash in 2022, and the visionary founder and CEO Jeff Lawson had to step down at the beginning of 2024.
The new management team around CEO Khozema Shipchandler is doing a really good job: Twilio continues to grow at around 5% per year, even after some unprofitable activities were discontinued. Cash flow has multiplied within a year, the company's shares now cost less than 10 times free cash flow and will be GAAP profitable in the near future. Twilio's EV/Sales ratio is around 2.
I am very pleased with this turnaround and have added Twilio to the High-Tech Stock Picking wikifolio for the second time after 2018. You will be able to read the new Twilio investment case on this Substack in the coming weeks, so if you’re interested
And what about ZoomInfo?
Astute observers of this Substack may be wondering whether ZoomInfo doesn't fit into this prey scheme as well. Indeed, this SaaS provider is also available at an EV/FCF ratio of 10 after the recent share price collapse, despite growing free cashflow per share. Nevertheless, I am selling my ZoomInfo position entirely after the disappointing half-year results, realizing a substantial loss. The main reason for my exit from ZoomInfo was a loss of confidence in the company's management. But that's another story.
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*Disclaimer: The author and/or associated persons or companies own shares in Vimeo, PayPal and Twilio. This article is an expression of opinion and does not constitute investment advice.
My Twilio bags like that headline :)