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Software landscape: Growing confidence & valuation levels

8 Jan 2024

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
Software landscape: Growing confidence & valuation levels