Software Index

State of the Market

The Scalar Software Index's next twelve months (NTM) top-10 revenue multiple is down 2.6% month over month to 14.6X, and the Scalar Software Index NTM median revenue multiple is down 5.7% month over month to 5.6X. Market concerns about the Federal Reserve’s delay in lowering rates and hawkish commentary from various members of the Federal Reserve Board influenced the pullback in growth stocks, including many software companies in the Scalar Software Index.

Notwithstanding, the Bureau of Labor Statistics released its Consumer Price Index (CPI) results from April, which increased only 0.3%, or 3.4% annualized, versus March’s increase of 0.4%, or 3.5% annualized. The markets rallied on the good news, with the NASDAQ reaching its all-time high, and the Dow, which consists of 30 companies considered to be leaders in their respective industries, surpassing 40,000 for the first time ever.

The pre-IPO market continues to lag, primarily due to valuation expectations. While talking heads indicate the IPO market isn’t open, Arm, Instacart, Reddit, and Astera Labs recently went public, with all stocks currently trading higher than their respective offering prices. However, aside from Astera Labs, the other three technology companies went public at a price below their most recent pre-IPO private round of funding, which is the crux of the issue. Many private technology company unicorns have plenty of cash on their balance sheets, having raised large sums of capital during the zero-interest-rate policy (ZIRP) of 2020 and 2021; they don’t have a pressing need to go public or raise additional private funding, especially if it means a significant down round. Therefore, many of these companies will continue to operate privately until their financial performance results in favorable valuations relative to current multiples (2021 LTM EV/Revenue median top-quartile multiple was 25.3X versus May 1, 2024 LTM EV/Revenue median top-quartile multiple of 9.4X).