Europe's Software Vendors Highly Valued in US Comparison
European investment bank Bryan, Garnier & Co today presented a study that clearly refutes the widespread structural undervaluation of European software vendors. When the usual EV/sales multiples (enterprise value / expected sales for the next year) are related to the average expected growth over three years (CAGR), European software vendors are even trading at a valuation premium of around nine percent (eight percent in the case of SaaS providers) compared to their US competitors.
For this analysis, software analyst Gregory Ramirez compared the valuations of all 95 European-listed and 97 US-listed software vendors between 2006 and 2020, for which there is historical analyst consensus data from Refinitiv. These companies include 29 European and 67 US SaaS vendors.
A superficial look at the simple sales multiples shows that the US providers' multiple of 9.9 over the last 15 years is significantly higher than the 5.6 of their European competitors. However, if the stock market value is not only assessed on the basis of the simple sales multiple, but average growth1 is taken into account and both are placed in relation to each other, a completely different picture emerges. This puts the significance of the sales expectation for the next year into perspective.
For example: if in April 2021 Salesforce shares were trading at a revenue multiple of 10 (10x expected revenue in 2022) and the expected average revenue growth (CAGR) for 2020-2023 is 20%, the ratio is 10 / 0.2 / 100 and the newly calculated ratio is 0.50. The analyst did this calculation for the 15 years up to April 2021 and came up with a surprising result, which is that the valuations of software companies on the European stock exchanges are not only on par with the companies listed in the US, they are slightly higher. For the Europeans, this results in an average valuation that is nine percent higher than that of their US competitors. The same principle applied to the 29 or 67 (US) listed SaaS providers over a four-year period yields almost the same result: here, the average premium is eight percent.
Ramirez explains: "This picture is much closer to the reality of the stock market valuation. This weighting with the average growth rate normalizes the multiples and thus relativises the significance of the short-term growth expectation for a single year.”
The study also shows that the differences in the individual valuations of software providers listed in Europe are wider than those of their US competitors. This dispersion cannot be explained by a significant number of loss-making companies among European software vendors, nor by the liquidity of their shares. Contrary to another common prejudice, the most highly valued European software stocks are by no means always the most liquid, nor are they necessarily listed on the most liquid markets.
Valuation is not decided by the stock market
Bryan, Garnier & Co explain that the heterogeneity of the valuation of European software providers is a result of very different business models, track records and corporate governance. Above all, the degree of maturity of the European companies is very different, while US companies almost always have a long maturation process with numerous financing rounds behind them before going public.
"This makes it clear that the stock exchange location is not decisive for the valuation of a software company. It's all about the quality of the business model and management, the degree of maturity and the track record to date," explains Greg Revenu, Managing Partner of Bryan, Garnier & Co. This is an important insight, he says, "because for Europeans an IPO in the USA is usually associated with many difficulties.” Pierre Kiecolt-Wahl, Partner and Head of ECM at Bryan, Garnier & Co adds: "If the stock market success of European software companies is ultimately independent of the chosen stock exchange, there is not the slightest argument against an IPO on a European stock exchange."
Debunking the software valuation gap: European software companies going public in the US
Bryan, Garnier & Co will be hosting a webinar on Thursday 27 May, 10h CET – 10h45 to discuss the report findings in more detail. Join us >>
About Bryan, Garnier & Co (www.bryangarnier.com)
Bryan, Garnier & Co is a European, full-service growth-focused independent investment banking partnership founded in 1996. The firm provides equity research, sales and trading, private and public capital raising as well as M&A services to growth companies and their investors. It focuses on key growth sectors of the economy including Technology, Healthcare, Consumer and Business Services. Bryan, Garnier & Co is a fully registered broker dealer authorized and regulated by the FCA in the UK, the AMF in Europe and the FINRA in the U.S. Bryan, Garnier & Co is headquartered in London, with additional offices in Paris, Munich, Stockholm, Oslo, Reykjavik and New York.
1 CAGR - in this case a three-year moving average of the expected growth rates of the current year and the next two years
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