Source-to-Pay, B2B payment valuations in an inflationary world

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Why revenue growth without profit is no longer acceptable.

For those of us that knew inflation — and I believe that is anyone that is 60+ — we can probably recall stories of our parents or grandparents never throwing away anything. My dad never threw away tinsel to put on the annual Christmas tree and my mother never threw away aluminum foil. You never forget lines for gasoline during the OPEC 1970s era.

For most of us in the working world, we have lived in deflationary times — the last 40 years. David Foster Wallace’s story, “This is Water,” is appropriate for today’s management. The story involves two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, “What the hell is water?”

That is us today with inflation. What is inflation? Aren’t CPI metrics just “constructed” realities to support narratives from the central bankers but don’t necessarily reflect what we see and feel on the ground? Inflation expectations cannot be controlled. And for the last 40 years, we have experienced deflationary pressure (this could have something to do with globalization, but there are many factors).

So how does all this relate to valuations and profitability when it comes to source-to-pay vendors, who predominantly sell some form of SaaS solution to help you buy and pay for things better or a payment solution, tying global gateways, settlement, APIs, etc.?

Not a week goes by when fundraising and valuations on S2P and payment companies seem outrageous. There is a long list, and includes everything from SPACs like Billtrust or Payoneer, to IPOs to late-stage fundraising like the recent Stripe raise. It also includes companies that have been around for more than a decade or two, that rely on revenue growth numbers as their key metric (again, not to pick on anyone, but think Bill.com, Tradeshift, Taulia, etc.) but either do not divulge earnings, given their private nature, or have lost money since inception.

See, I believe the zeitgeist has changed around inflation. It is happening everywhere if you look hard enough.

For example, some of my contacts have mentioned the following increases:

  • Corrugated box prices increased 9% in January and are set to increase an additional 12%-14% in May.
  • High-precision gearing and steel prices are up 30% to 50% since January.
  • China “spot” lithium price continues to move up, even as OEMs announce new EV projects (note: most in the EV industry think lithium is plentiful — it is, but not the high-grade specifications you need for EV batteries).
  • All building supplies are going up, from lumber to drywall. Builders who don’t have commodities clauses will have to pay the increases.

These are just a snippet of examples, but looking at government statistics will only tell you what the numbers are based on how they calculate inflation — and believe me, there are many who have issues with that.

But why is this important for SaaS companies?

Costs are no longer easy to manage in an inflationary world — labor, cost of capital or even materials.

Today, cost of capital is nearly zero for firms. Firms in an advantageous credit position can grow their business as long as the lines of credit are there — see Fleetcor and corporate B2B payments. I can buy companies to buy growth. It creates top-line revenue growth, which is all the rage.

Historically, profitless revenue growth drove the multiple. But during inflation, all bets are off. Costs go up, and it gets harder to pass price increases on to customers unless you are an absolute have-to-have and have pricing power — just ask any creative person who uses Adobe!

Is the water changing for all companies? There is definitely something going on now. Certainly, the 10-year Treasury yield is indicating inflationary expectations.

As the investment world starts incorporating what all this means and realizes not everything is about top-line growth, and cost of capital, inputs, and other costs go up, what is the new metric to start looking at?

Is it, wait, profits?

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at) globalbanking.com.

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