Most investors are likely to be aware of Xero FPO NZX (ASX: XRO), Aconex Ltd (ASX: ACX) and WiseTech Global Ltd (ASX: WTC). The three are currently among the top 10 largest software companies trading on the ASX.
Despite operating in different industries (accounting, construction, and logistics), the three companies have a few things in common. Each employs a software as a service (SaaS) model and has growing subscription revenues and a global focus.
All three are highly innovative, founder-led, and were featured in the 2016 Tech Pioneers Report.
But how do they compare at current valuations?
The typical way to value SaaS companies is to look at revenues relative to market capitalisation or enterprise value. These need to be considered in the context of the company's growth rate and potential.
As with most other technology stocks on the ASX, shares in Xero and Aconex have experienced a pullback in recent months. WiseTech has been the exception, with shares still close to their all-time highs.
Xero
Xero has an enterprise value of $2.23 billion (NZD) and earned revenues of $251 million (NZD) over the last 12 months, giving an enterprise value/revenue ratio of 8.8. However, as I have previously written, annualised committed monthly revenue (ACMR) is a better metric as it provides a 12-month forward view based on current subscriber numbers (assuming no further growth). Xero today reported ACMR of $303 million (as at 30 September), giving a ratio of 7.35 relative to enterprise value.
In my view, this is a reasonable multiple to pay considering Xero's growth rate – ACMR grew by an impressive 53% in the last 12 months.
Aconex
For Aconex, an enterprise value of $864 million and trailing 12-month revenues of $123.36 million gives a ratio of around 7.
Aconex's revenues grew 50% on the prior year. A recent update included an estimate for 2017 revenues of up to $180 million, implying further growth of around 45% and a revenue multiple of 4.8. Revenues are expected to continue growing at 20%-25% for the next few years.
Shares have recently fallen nearly 40%. In my view, Aconex is starting to look like good value, however, shares are still more expensive than the revenue multiple of 3.5 paid by IPO investors in late 2014.
WiseTech Global
WiseTech has an enterprise value of $1.65 billion and revenues of $102.8 million, giving a ratio of around 16.
WiseTech's revenue grew 30% in the last year. Recently upgraded expectations for 2017 are for up to 50% in revenue growth to $148 million to $155 million implying a forward-looking revenue ratio of around 11.
WiseTech is a great business; as an investor, I am happy to hold, but in my view, new investors should wait for a pullback before investing. Considering their growth rates and revenue multiples, I prefer Aconex and Xero at current prices.
