#whatstrending feat. Beansprout

Ever wondered what is currently driving the local and regional markets? #whatstrending is a series addressing some of the most trending questions/topics on the markets for investors. Designed to be educational, expect to get factual information on what is driving sectors and stocks listed on SGX, featuring insights from professionals in the community.

Today, we hear more from Beansprout, a MAS-licensed investment advisory platform offering expert insights on Singapore stocks, REITs, ETFs and bonds. Gerald Wong, founder and CEO, shares his thoughts on market developments. 

A quick recap on Software-as-a-Service (SaaS):

Instead of buying software as a one-time purchase and installing it on a single device, SaaS allows users to access applications through the internet on a subscription basis, providing greater convenience, flexibility and lower costs as compared to using traditional software.

SaaS companies generate revenue through different pricing strategies, including:

• Subscription-based: Customers pay monthly or annually, ensuring a steady revenue stream for the company.
• Freemium: Basic features are free, with premium features requiring payment (e.g., Zoom’s free basic plan with paid upgrades.)
• Usage-based: Fees are charged based on actual usage, such as cloud storage or API calls (e.g., Twilio and Snowflake)
   

Q: What are some key metrics to evaluate SaaS companies?

From Gerald Wong, founder and CEO of Beansprout:

  1. Annual Recurring Revenue (ARR)

• This measures the predictable revenue a SaaS company earns from subscriptions over a year. It offers a clear and reliable projection of a SaaS company’s future revenue, assuming consistent customer retention and steady sales growth.
• ARR is calculated by adding total revenue of yearly subscriptions with the total revenue from add-ons and upgrades, less the total revenue due to downgrades, cancellations and churn.
• Companies grow ARR by acquiring new customers, upselling existing customers, or expanding their product offerings.

   2. Recurring Revenue Mix

• This is a percentage of revenues that are subscription-based, out of a SaaS company’s total revenue. The higher the recurring revenue mix, the larger the amount of consistent and predictable revenue stream a company has.
• For publicly listed SaaS companies, the recurring revenue mix range from 66% to 89%, with the average at 80%, according to Shea & Company.
   

   3. Retention Rate

• This measures how well a SaaS company keeps its customers over time – for evaluating customer satisfaction, service quality, and the long-term health of the business. There are 2 main types:
  • Gross retention rate – Measures the ability to retain existing customers, and measured by the current period ARR, less the downgrade ARR (decrease in revenue caused by existing customers) and less the Churn ARR (revenue lost due to customer cancellations).
  • Net retention rate – Measures the ability to expand with existing customers, and measured by the current period ARR, less the downgrade ARR, less the Churn ARR and with the addition of LTM net expansion (expansion revenue from upsells, cross-sells, and add-ons from current customers).
     

   4. Lifetime Value (LTV) vs Customer Acquisition Cost (CAC)

• LTV: Estimates the total revenue a company can earn from a customer over their lifetime.
• CAC: Measures how much a company spends to acquire a new customer.
• A strong SaaS business typically maintains an LTV to CAC ratio of at least 3:1, meaning the revenue earned from a customer should be at least three times the cost of acquiring them.
   

Q: How should we value SaaS companies?

From Gerald Wong, founder and CEO of Beansprout:

• The Rule of 40 is widely recognised as a metric for evaluating growth. Companies exceeding this threshold are generally viewed as financially healthy and tend to trade at higher valuations. As of January 2025, SaaS companies which have exceeded the Rule of 40 trade at an average Enterprise Value-to-Revenue (EV/Sales) ratio of 11x, compared to companies whose sum of revenue growth rate and profit margin are between 30% to 40%.

• Traditional valuation metrics like price-to-earnings (P/E) ratios are less relevant for SaaS companies, many of which operate at little or no profit. Instead, the Enterprise Value-to-Revenue (EV/Sales) ratio is widely used. This measures how many times annual revenue a company is worth. Historically, SaaS companies have traded at higher EV/Sales multiples compared to the broader market due to their recurring revenue and strong growth potential.

Keen to find out more about the SaaS Industry? Listen to an
interview with the Chief Strategy Officer of Avepoint.

Beansprout recently spoke to Mario Carvajal, AvePoint's Chief Strategy & Marketing Officer.

As AvePoint’s Chief Strategy & Marketing Officer, Mario is responsible for all aspects of the AvePoint brand and marketing approach for customers, partners and investors, while maintaining responsibility for developing the Company’s growth strategy and initiatives such as corporate development, strategic planning, mergers and acquisitions, and strategic partnerships.

Watch it here.

Missed the SaaS sector webinar? Watch it
here.
For more detailed analysis on SaaS, read the full report here.

For more insights on Singapore stocks, REITs, ETFs and bonds, visit growbeansprout.com.

Enjoying this read?

• Subscribe now to the SGX My Gateway newsletter for a compilation of latest market news, sector performances, new product release updates, and research reports on SGX-listed companies.
• Stay up-to-date with our SGX Invest Telegram channel.