Microsoft-backed IPO breaks rule of 40 at bad time

Rebel. Rubrik is attempting to rewrite rules of success. Microsoft-backed cybersecurity firm filed to go public in early April flaunting a useful metric used to determine success of faster-growing technology firms. window for initial public offerings is tentatively cracked open, but investors are more discerning. It’s a tough time to buck norm.

Founded in 2013, Rubrik is in business of protecting data, analyzing threats, and helping organizations recover from cyberattacks. It counts over 6,100 enterprise customers including Home Depot , Pepsi and Goldman Sachs. And its relationship with Microsoft has been helpful. “Ruby” – its artificial intelligence unit – enlists $3 trillion tech giant’s help with software.

Much like Microsoft’s model, company led by Bipul Sinha recently pivoted away from licensing agreements and toward a subscription-based cloud computing business. change is reflected partly in its top line: Revenue tied to licenses more than halved in fiscal year ending January 2024, but subscription revenue increased 40% during same period.

Noneless, Rubrik is part of software as a services (SaaS) club, a group that largely heres to Rule of 40. metric combines a company’s revenue growth rate plus its free cash flow as a percentage of sales. If two d up to more than 40, it’s a good indicator that a high valuation is warranted. In a study by McKinsey that analyzed SaaS companies, those that matched or exceeded rule h enterprises that were worth 22 times sales, or roughly three times multiple of those companies that didn’t. If Rubrick justified higher valuation, it would be worth $14 billion, more than triple what it was valued at when Microsoft paid for a stake in 2021, according to Bloomberg.

Yet it is nowhere near Rule of 40. Overall revenue increased just 5% for year ending January 2024. Rubrik’s cash burn has increased, from negative $15 million in fiscal 2023 to negative $24 million for most recent year. Losses are widening.

Meanwhile, investors are tightening ir standards. In 2021, median SaaS company that went public fell short of Rule of 40 with a score of 36, according to data from investment firm Iconiq. Almost 80% of those companies are now tring below ir IPO price. On McKinsey’s average multiple of 8 times sales for those companies whose growth and free cash flow fall short, Rubrik’s enterprise value based on last year’s revenue would be $5 billion. That is approximately valuation Palo Alto, California-based company is aiming for, according to an updated U.S. regulatory filing on Tuesday. With shareholders more focused on earnings it lacks, Rubrik is right to lower its value expectations.