{"id":14529,"date":"2023-09-05T06:30:40","date_gmt":"2023-09-05T11:30:40","guid":{"rendered":"https:\/\/reformingretail.com\/?p=14529"},"modified":"2023-09-05T06:30:42","modified_gmt":"2023-09-05T11:30:42","slug":"when-does-the-market-recognize-the-saas-vs-payments-arbitrage","status":"publish","type":"post","link":"https:\/\/reformingretail.com\/index.php\/2023\/09\/05\/when-does-the-market-recognize-the-saas-vs-payments-arbitrage\/","title":{"rendered":"When Does The Market Recognize The SaaS vs Payments Arbitrage?"},"content":{"rendered":"\n

Software businesses trade on a multiple of revenue, with the median multiple<\/a> for public SaaS companies over the past 15 years around 6x the last twelve month’s revenue (as of March 2023 it’s 7.1x). <\/p>\n\n\n\n

Service businesses only trade at 1x revenue.<\/p>\n\n\n\n

So if you’re going to invest your time doing something, you need to get paid 7.1x more to do services or you’re not investing your time the right way.<\/p>\n\n\n\n

Over the past five years, payments companies have seen their valuations jump as investors realized “wait a minute: there’s this required cost of business that is 100% price inelastic, 100% margin, and 99.99% of customers are so stupid they’re going to constantly pay more for the service”.<\/p>\n\n\n\n

And so in came all the software companies, who grew weary of doing hard work to make peanuts relative to these payments companies.<\/p>\n\n\n\n

Since then payments companies like GPN, EVO, FIS have been hammered as software companies steal all their volume.<\/p>\n\n\n\n

(And in time, the software-posing payments companies will be exposed as well.)<\/p>\n\n\n\n

Meanwhile, payments revenue trades the same as if its software revenue.<\/p>\n\n\n\n

Something doesn’t strike us as right, here.<\/p>\n\n\n\n

Software has IP.<\/p>\n\n\n\n

It takes a lot of time and money to properly build software. It’s incredibly competitive. It experiences lower churn and is often recurring in nature accordingly.<\/p>\n\n\n\n

Payments has negative IP.<\/p>\n\n\n\n

It’s the definition of a commodity, and your dog could sell payments tomorrow. <\/p>\n\n\n\n

So why do payments companies trade at the same multiples as software companies?<\/p>\n\n\n\n

Something feels fundamentally mispriced here.<\/p>\n\n\n\n

Now, there’s the argument that software companies are swapping one revenue stream for the other.<\/p>\n\n\n\n

For example, a software company is lowering the price of their software to win accounts and they’re going to instead make money on payments.<\/p>\n\n\n\n

But.<\/p>\n\n\n\n

And this is not a trivial but.<\/p>\n\n\n\n

The customers of these software companies would NOT have paid the price of the software + payments for just the software company’s software<\/strong>.<\/p>\n\n\n\n

You think a Shopify merchant would pay twice the price for their software?<\/p>\n\n\n\n

A Toast merchant would pay 4x the price for their software?<\/p>\n\n\n\n

Of course not.<\/p>\n\n\n\n

Software is billed to a merchant’s credit card or bank, and the merchant experiences cost transparency accordingly – i.e. they can audit what they’re paying.<\/p>\n\n\n\n

Payments is a hidden, festering cancer of a solution, so payments companies can – and too often do – charge whatever they want, and the merchant has no idea what they’re paying.<\/p>\n\n\n\n

This is why the current goal for pretty much every company is to undertake the minimum possible to own the payments.<\/p>\n\n\n\n

But that doesn’t mean that the two revenue streams should be viewed as interchangeable. <\/p>\n\n\n\n

Software deserves a superior multiple to that of payments.<\/p>\n\n\n\n

At some point this will need to be reconciled.<\/p>\n\n\n\n

Private investors are a bit sour on fintech right now, but many of the public, blended fintech companies (SQ, TOST, et al.) are still out of whack. <\/p>\n","protected":false},"excerpt":{"rendered":"

Software businesses trade on a multiple of revenue, with the median multiple for public SaaS companies over the past 15 years around 6x the last twelve month’s revenue (as of March 2023 it’s 7.1x). Service businesses only trade at 1x revenue. So if you’re going to invest your time doing something, you need to get […]<\/p>\n","protected":false},"author":1,"featured_media":14935,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"image","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[5,3],"tags":[],"class_list":["post-14529","post","type-post","status-publish","format-image","has-post-thumbnail","hentry","category-solutions","category-pos","post_format-post-format-image"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2023\/09\/code-1839406_1280.jpg?fit=1280%2C854&ssl=1","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p81nA2-3Ml","_links":{"self":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/14529","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/comments?post=14529"}],"version-history":[{"count":4,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/14529\/revisions"}],"predecessor-version":[{"id":14934,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/14529\/revisions\/14934"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media\/14935"}],"wp:attachment":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media?parent=14529"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/categories?post=14529"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/tags?post=14529"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}