Software Index

State of the Market

The NASDAQ and S&P 500 continue to climb to new highs. The NASDAQ Composite Index reached an all-time high of 16,274 and the S&P 500 surpassed 5,175. The Scalar Software Index top-10 next twelve month (“NTM”) median multiple increased 9.1% month-over-month to 16.4X and the Scalar Software median NTM multiple increased 7.5% month-over-month to 6.0X.

Nvidia reported a blowout fourth quarter ending January 28, 2024. The company’s Q4 revenue was $22.1B, up 243% year-over-year and the company reported full-year revenue of $60.9B, a 126% increase. Nvidia’s phenomenal financial results increased the company’s market cap north of $2T and led to a market rally.

Reddit announced its plans to go public at a ~$6B valuation. The company plans to raise ~$750M in its IPO. This news comes on the heels of Astera Lab’s announcement of IPO at a valuation of ~$4.5B. Assuming both companies have successful IPO’s, we would expect additional late-stage technologies companies to follow suit and file confidential S-1’s to begin the IPO process.

The US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased by 3.2% in February, and total nonfarm payroll employment rose by 275,000 in February, increasing the unemployment rate to 3.9%. Both results were stronger than expected, but the markets rallied nonetheless.

According to AlleyWatch, $8.3B was invested in 473 US venture-backed companies in February. This marked a 16.5% increase from the previous year.

The inflation and employment data juxtaposed to the continued appreciation in the public markets provide economists with the difficult task of predicting the economic outlook for the remainder of this year. If the public markets remain strong and continue to grow, even at a decelerated rate, we may see an increase in M&A activity in the private markets. This outcome would be a warm welcome to founders, VC/PE funds, and limited partners, which have seen technology company valuations cut by more than half from the zero-interest rate policy (“ZIRP”) timeframe (the top quartile last twelve-month enterprise value to revenue multiple during ZIRP was 25.3X).

Alternatively, if inflation continues to be persistent, then the Federal Reverse may not decrease the Federal Funds Rate as quickly as originally predicted. Former Secretary of the Treasury Larry Summers recently stated that there’s a 15% chance the Federal Reverse increases the Federal Fund Rate, versus lowers the Federal Funds Rate multiple times this year (which has been the consensus among economists). In this scenario, we would anticipate the markets to pull back and the implied revenue multiples for technology companies to reverse course and end the year lower than today.