A few days ago, I conducted a thought experiment. I explored whether SaaS valuation multiples could go as low as 3x ARR.

In February 2016, SaaS multiples were at 3.3x forward revenue. At the current 26% median annual growth rate (EMCLOUD) that corresponds to 4.2x ARR. Not 3.3x. But not pleasant either.

Not surprisingly, thoughts of valuations as low as 3-4x revenue were not popular amongst the SaaSserati.

And, as I wrote, I don’t find that to be the most likely scenario from here.

Why do I still see volatility (and potential downside) in the stock market short term?

This weeks’ US inflation print was surprisingly benign, coming in at 7.1% vs market expectations of 7.3%. Markets responded favourably on Tuesday, with the S&P500 initially up 2.6% before falling back.

Powell, much less so. He has been clear that he intends to continue to increase rates to stamp out any last vestige of inflation. So there. After raising rates by 0.5% on Wednesday (to 4.25% – 4.5%), he promised further increases in 2023. The Feds median estimate for the end of 2023 is now 5.1%. This is higher than most investors forecast. It is also likely to put a damper on economic activity in the new year.

If we take Powell at his word, investors will inevitably be disappointed.

So 2023 is likely to be wobbly. But that doesn’t detract from the medium-term opportunity. And that is the exciting bit.

Advances in 2022

2022 has been an odd year. Inflation has been raging, and Putin has been warmongering. And most people’s pensions have taken a hit as stock prices have deflated.

BUT

2022 has also been a year of reaching incredible technological milestones.

• AlphaFold AI predicted all known protein structures. Scientists can now predict how more than 200,000,000 proteins fold. That’s up 1,000x from what we could do before AlphaFold. This is transformative in drug research.
• The James Webb telescope became operational. This helps us better understand the origin of our universe. It is also the culmination of two decades of scientific work.
• Scientists at the Lawrence Livermore National Laboratory succeeded in creating Nuclear fusion ‘Ignition’. It is a major milestone towards limitless, clean energy. And it is something scientists have been chasing for decades.
• OpenAI released ChatGPT – a chatbot that passes a Turing Test. This milestone is something computer scientists have been pursuing for 70 years.

These breakthroughs won’t change the fabric of society overnight. But they unlock so much potential for the decade ahead. In energy, in medicine, in manufacturing and in transport/logistics. And AI/software will supercharge advances across all these domains.

Markets will likely be wobbly in the near term as we unwind inflation. But the medium-to-long-term prospects are incredible.