Graduation Year

2018

Date of Submission

5-2018

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Eric Hughson

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© 2018 Jonathan P Shaw

Abstract

Originally a venture capital heuristic, the Rule of 40 efficiency score – the sum of revenue growth plus profitability – is widely believed by management teams and investors to drive shareholder returns in publicly-traded software-as-a-service (SaaS) stocks. This paper analyzes the effect of efficiency score on SaaS stock returns by segmenting the SaaS universe by efficiency score and comparing returns. Although I find that high efficiency score SaaS stocks outperform low efficiency score names on a gross returns basis, there is no significant difference in risk-adjusted returns (alpha generated over relevant benchmark models) between high and low efficiency score stocks. Significant alpha outperformance of high efficiency score SaaS stocks over US equity market benchmarks is likely explained by the strong returns of the SaaS universe as a whole, rather than high efficiency score stocks’ outperformance within the SaaS subsector.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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