In December 2022, Mads Jensen expects continued market volatility into 2023 as the Fed keeps raising rates, but remains bullish on the medium term because of 2022's technological milestones in AI, protein folding, space science and nuclear fusion.
- In February 2016 SaaS multiples were 3.3x forward revenue, equivalent to 4.2x ARR at the then-current 26% median EMCLOUD growth rate, though the author did not see that as the most likely scenario.
- US inflation came in at 7.1% against expectations of 7.3%, but the Fed raised rates by 0.5% to 4.25 to 4.5% and projected a median 5.1% by the end of 2023.
- The author expected 2023 to be wobbly because investors hoping for an earlier easing would be disappointed.
- 2022's milestones included AlphaFold predicting more than 200 million protein structures, the James Webb telescope becoming operational, fusion ignition at Lawrence Livermore and the release of ChatGPT.
- He expects AI and software to accelerate advances in energy, medicine, manufacturing and transport and logistics over the decade ahead.
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.
Frequently Asked Questions
Why did the author expect stock market volatility in 2023?
Because Fed chair Jerome Powell signalled further rate rises to stamp out inflation, with a median end-2023 estimate of 5.1%, higher than most investors forecast and likely to dampen economic activity.
What made him optimistic despite the volatility?
The technological milestones of 2022, including AlphaFold, the James Webb telescope, nuclear fusion ignition and ChatGPT, which he believes unlock great potential in energy, medicine, manufacturing and transport over the next decade.
Could SaaS multiples fall to 3x ARR?
The post revisits a thought experiment showing SaaS multiples were 3.3x forward revenue in February 2016, but the author says he does not find that the most likely scenario.