Date of Submission
Campus Only Senior Thesis
Bachelor of Arts
© 2018 Jonathan P Shaw
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.
Shaw, Jonathan, "Using the Venture Capital Rule of 40 to Predict SaaS Stock Returns" (2018). CMC Senior Theses. 1991.
This thesis is restricted to the Claremont Colleges current faculty, students, and staff.