Software-Branche: Zunehmendes Vertrauen und steigende Bewertungen

Our latest software sector report highlights dynamics and developments, as well as M&A trends in the software industry.

> Download the full report here 

For busy readers in a nutshell:

Valuation levels are climbing and there are clear signs of growing confidence across the software market

• Disclosed M&A revealed the highest quarter of valuation levels over the last 4 years (4.7x LTM revenues), though Carlsquare continues to observe some holdover bid-ask spread between seller and investor expectations in private markets (and overall deal volumes through Q3 and Q4 2023 remained more than one third below four-year averages). Despite lower deal volumes and funding levels, high quality software businesses continue to achieve attractive premium valuations
• Carlsquare has observed that the private equity community is increasingly preparing assets for 2024 sale processes given improving market conditions
• Two previously announced mega-deals completed in Q4 (Broadcom’s acquisition of VMware (5.0x, $69Bn) and Microsoft’s acquisition of Activision (7.1x; $62Bn)) drove disclosed deal value to $190Bn, the highest quarter by a wide margin in the last four years

Profitability continues to be a core focus for investors, but growth software companies have regained their valuation premium

• Since Carlsquare has tracked this data in 2018, high growth (and unprofitable) software businesses have historically traded at a premium to their mature, slower growth (and profitable) peers. Multiples for both groups often move in tandem, and premium has typically been 1-2x revenue, but the gap peaked in 2021 at a delta of 2.6x revenue when the two diverged and growth companies reached very high levels driven by pandemic market stimulation
• In 2022 and through August 2023, unprofitable growth companies traded at a discount to their profitable peers (driven by a flight into equities in sectors with stronger free cash flow and less sensitivity to rising interest rates). Today, higher growth (unprofitable) companies have returned to a higher valuation level (6.2x) than mature (profitable) software companies (5.0x), which is an indication of growing confidence in the sector
• The long-term trend is that investors’ preference has returned to valuing growth at the expense of profitability, resulting in an increasing proportion of listed software businesses to remain unprofitable for longer