Enterprise SaaS vs. Health IT SaaS Valuation Analysis

May 05, 2017

We’ve often found ourselves questioning why it feels like the Health IT SaaS sector trades at a discount to the broader Enterprise SaaS market. While Health IT definitely has its share of high multiple companies like HealthEquity and Teladoc, the vast majority of publicly traded HIT SaaS companies trade in the 3x to 5x revenue multiple range. On the other hand, generalist Enterprise software companies like Salesforce or Intuit tend to trade higher in the 5x to 7x revenue multiple range.  We’ve excluded non-SaaS companies from our analysis, and admittedly there is a prevalence of site and perpetual license models in Health IT as compared to other industries due to a legacy preference for non-hosted protected health data.

There are many factors that play into public company valuations, however for Enterprise SaaS companies the most commonly scrutinized statistic is growth rate. We see this trend with M&A valuations as well - the growth rate is usually the number one factor they look for in an investment. We therefore decided to create a quick plot to graphically display how revenue multiples and growth rates compare between generalist publicly traded Enterprise SaaS companies and Health IT SaaS companies.

What we found out was that the two groups were nearly indistinguishable from each other. Overlaying linear trendlines to the data, there was no difference in the slope of these lines and only a miniscule difference in y-intercept. We thought there would be an obvious separation between the two groups to match our hypothesis, but something else started to become apparent:

Health IT SaaS companies just aren’t growing as quickly compared to their generalist counterparts. If the set of Health IT companies were able to grow more quickly, it is likely that their valuations would become more in line with general Enterprise SaaS companies.

The reason for Health IT’s slow growth rate is no doubt a complex combination of factors including longer sales cycles, heavy regulation, and slow adoption rates. Potentially it may be due to the relative immaturity of the healthcare software market, and a different mix of publicly traded comps in Health IT as compared to the larger and more mature Enterprise SaaS market.  Eventually we would expect to see Health IT valuations increase as these relatively nascent companies mature and develop unique ways to handle these handicaps.



The data can be used as a rudimentary guidepost for SaaS valuations.  Using the y-intercept as a measure, at a 0% growth rate, a SaaS company can expect to trade at 2.8x revenue.  For each 10% increase in growth, there is approximately a 1x increase in revenue multiple (1.04x to be exact based on the slope of the regressions).  The r-squared coefficient, which effectively describes the goodness of fit in the sample set, is lower for Health IT than Enterprise SaaS, meaning that the regression formula is less reliable for HIT than that of Enterprise SaaS.  This is just one admittedly oversimplified way of looking at the very complex formula of valuation.


~George Bailey - Analyst, Healthcare Growth Partners