Por primera vez en mucho tiempo el momentum es positivo para las empresas de desarrollo de software en Europa, dentro del segmento de las pequeñas y medianas empresas (pymes).

A continuación podemos ver el momento y la evolución de las expectativas de mercado en las pymes que desarrollan software:

Estos datos los calculo sobre un índice que he construido basado en 29 pymes que cotizan en los diferentes mercados dentro de Europa.

Me ha sorprendido porque la situación macroeconómica no es buena con muchos riesgos latentes y porque el resto de segmentos que sigo hasta ahora (gaming y contenidos de internet) siguen en rojo, pero la senda y fuerza de las empresas de software está en otra fase.

Para mi es un indicador semi adelantado porque está basado en las expectativas de los inversores. Siempre hay que cogerlo con cuidado porque las empresas de pequeña capitalización tienen poco volumen de contratación, aunque para eso me baso en un conjunto de empresas relativamente amplio en lugar de una sola.

Las empresas que aquí utilizo son aquellas cuyo valor de mercado (capitalización) está por debajo de 50 millones de euros, siendo la media y mediana de 19 M euros. Aquí está la potencia de estos índices, que nos hablan de cómo está valorando el mercado pymes de entre 5 y 50 trabajadores, pero el mercado abierto y transparente, no el cerrado y opaco del mundo venture capital.

Después del ajuste sobre la locura que se vivió en 2020 con el covid-19, que ha durado ya dos años, el momento, poco a poco, coge fuerza y es positivo.

Las expectativas de mercado o índice de percepción de los inversores para las pymes de desarrollo de software van consolidando fuerza en una época de alta incertidumbre.

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This is the second post in a series to explain how I am building an index of the European gaming industry in the SME segment. It will be followed by 3 other industries in the same segment.

In the first post I wrote about market momentum and investor perception. In this post I will focus on valuation.

When I write «valuation» I am referring specifically to how the market is valuing a gaming SME, i.e. valuation by multiples.

Such a valuation is never a substitute for a specific valuation of your company, with all of the constraints, but it is a reasonable guide to the range of values your business is likely to be in.

# EBITDA multiple: EV/EBITDA

This is the most commonly used valuation multiple in almost all industries.

The valuation of this multiple in our case is on a quarterly basis. Our study starts in 2Q 2018.

At the end of Q2, the market is valuing EV at 1.8 times EBITDA.

There are several precisions to be made here. The first is that I always use the median and not the average, and this is because with the median we avoid the extreme values that always distort the market multiple, and in nanocaps there are always extreme values.

The second precision is that in order to use this multiple, the company must be profitable. This is why the median EV/EBITDA is so low here because almost half of the companies in my index are loss-making.

Because of this, I have constructed the following graph:

The median is equal to the 50% quartile. I have entered the 75% quartile of the best companies (upper range) and the 25% quartile (lower range).

The upper range coincides almost exactly with the median of those companies that have positive EBITDA and the lower range is the same, but with those that have losses.

In a sample of larger cap companies, the median would be the correct value, but in nanocaps with growing SMEs, this value does not have to be the most appropriate. In fact, as we will see with the following multiple, it is better to use the upper range: x11.1.

Finally, a very useful chart also tells us that market valuations continue to fall. It relates the valuation of one quarter with respect to the same quarter of the previous year.

Valuations have been falling continuously since the second quarter of 2021.

It almost coincides with market momentum, although it is one quarter ahead of it: valuations decline one quarter before momentum turns negative.

# Sales multiple: EV/Revenues

This is a multiple that I don’t like because it is very crude, but it is useful when the company we are valuing is not making profits.

The sales multiple for a gaming SME in Europe is x3.4 at the end of 2Q 2023.

As all the companies in the index have sales, the band chart does not make so much sense, and in this case, the companies in the upper band are the worst performers.

You can see one thing; a big inconsistency with the EBITDA multiple: the sales multiple comes out higher. This is because companies with very bad results distort the multiples of this market. In this case, the following should be done:

• (1) If the company is profitable, use the upper band of the previous multiple: x11.1.
• (2) If the company is making a loss, use the sales multiple: x3,4

Here we see that valuations have been falling since Q2 2021 as well, but Q2 2023 has stopped the fall in valuations.

# Book value multiple: P/BV

This is a metric that does not make sense in new companies and startups, but in companies with a track record, it does. It gives us valuable information because, although it does not tell us about the future, it tells us about the trajectory of the business and how the profits generated have been managed.

It tends to underestimate the real value of the business, but it is a very stable multiple.

In this case the indicator is annual (and not quarterly like the previous ones).

It is currently at 2, with a value very similar to 2018. It is as if the business were valued similarly to 2018.

The evolution:

It gives similar information to the previous one.

# Challenge

One temptation I have had in this part has been to include larger cap companies, which would give more consistency to the earnings multiples and make my life easier, avoiding inconsistencies such as the sales vs. earnings multiple.

But then I would stop looking for the initial goal: market valuation in the SME segment.

In the next few posts, I will talk about business KPIs. This can give us an indication of where in the range of values we are getting.

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This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.

In this first post about the creation of an index with a valuation system for SMEs in the gaming sector.
In this first part, the goal is to understand the market momentum of the sector applied to SMEs in Europe that are not listed, but are growing and self-sustainable (they are financed by what they sell to their customers). They are neither start-ups nor large conglomerates.

The initial goal is to structure the industry in 3 sections:

1/ Market Momentum
2/ Investor valuation
3/ Industry peer performance

# Market Momentum

Momentum is the strength of this type of companies in the market, when the momentum is positive it means that they have strength, sales, results… and the perception of the investors is like this. When it is negative, it means that the results are getting worse and the perception of investors also perceives it as such.

When it is close to zero it is that a catalyst is needed to see where the industry is going; usually times of uncertainty or lack of interest from customers and investors.

A key to momentum is that when it takes on a direction it is much more probable that the direction will persist than the opposite. If momentum is positive it is expected to remain so.

/ Why is it important to know the momentum of an industry in the SME sector?

To know if it is a good moment to invest in a company, or to start a new business related to it, a spinoff, a side-project, a strategic alliance. For strategic decisions of any stackeholder of the company.

/ Why create a momentum index for gaming SMEs?

Because there is no transparent and reliable information on the subject.

In the unlisted world, venture capitalists are the ones who have the control, but it is very biased and opaque information and, fundamentally, to offer guidance to the owners and managers of SMEs operating in this industry, who in no case have this information (beyond the business itself).

/ Gaming SMEs market momentum

This is the graph up to 31 August 2023:

Above zero the momentum is positive: the market for this industry was pulling and the results of the companies within it were good.

Below zero the opposite.

We are now at a point where there is no momentum; uncertainty, standstill.

Another way to see this graph, in a visual and orderly way, is a matrix where you can see how the momentum is at the close of each month.

In green the months with more positive momentum and in red with more negative momentum. In white the months with momentum close to zero.

The momentum of the SME gaming industry in Europe was very positive throughout 2020 (totally conditioned by the pandemic) and the first half of 2021. From the third quarter of 2021 onwards the momentum has been negative, with 2022 being a negative year.

I think it has a powerful visual power to see at a glance how the sector is doing and where we are coming from.

# Investor perception

This is an index like the stock market index. But with certain particularities. The main one is that it is equally weighted for all stocks.

It is based on SMEs listed in Europe for the gaming industry; companies with a market capitalisation of less than 50 million euros (nanocaps).

At a glance, we see the big picture, how investors’ perceptions of these companies are evolving and where we stand. The important thing is that it gives us a perspective.

With these two elements we answer two important questions for my SME: what is the current state of the industry where I operate for companies of my size and how investors perceive it.

# Difficulties that I have encountered

In compiling this information, I have had to make decisions because I have encountered several problems.
The first is the information on listed companies.

As they are listed on different stock exchanges (in different countries), I found that in some countries they were listed and in others, they were not (due to national holidays, for example) and I had to reconstruct the gaps by hand.

As it was daily data, I had to do it all by hand, day by day for each security.

The second big problem in this phase has been the equiponderarían of the index from which the previous tables start. This has been more difficult because when you make a decision you leave out information that could be useful or you can bias the indices to one side or the other and lose objectivity.

At the beginning the index was very positive, however, most of the stocks, since the beginning of the study (07/2018) have a negative accumulated profitability, so there was a situation that did not make sense.

This is due to the fact that the equiponderation was rebalanced once a month, and as they were stocks with little movement, those few stocks that did move were the ones that were doing well and in 30 days could have almost all the weight of the index, which completely distorted the index in favour of the few companies that did have very good results and interest from investors.

The solution to this was to rebalance on a daily basis so that this distortion no longer took place.

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This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.

AVTECH is a Swedish company that operates in the aviation industry. Has 9 employees, is listed on the NASDAQ First North Growth Market (AVTECH Sweden AB ticker: AVT-B.ST), its capitalisation is around 20M€. No analysts, off the radar of most financial platforms and based on technological development..

I love with this kind of small and medium companies.

# Let’s take a look at some interesting things about this innovative european SME:

/ AVTECH Sweden AB’s products and services include weather uplink services, aviation weather forecasting, and digital air traffic management system. Product portfolio includes Aventus NowCast, Efficiency Analyzer, and other services that increase efficiency, reduce fuel consumption, and lower carbon dioxide emissions in the aviation industry.

/ The company’s customers are various players in the aviation industry, such as airlines, airports, aviation technology companies, and aircraft manufacturers. As

/ The company’s services are based on accurate weather data and advanced optimization algorithms.

/ AVTECH’s goal is to make air travel more sustainable by reducing fuel consumption and carbon dioxide emissions.

/ The company has been growing steadily over the years, with an increasing number of employees and exchange listings.

Let’s go deep into some financial numbers:

# Profitability:

Despite many years of losses, they have been growing steadily in sales and, most interestingly, they have been financed very well; the financial structure is optimal, with little debt and the IPO in 2012. This is very interesting, instead of going through many rounds of Venture Capital, as the NASDAQ First North Growth Market allows small startups to go public, they directly opted for this route.

# Liquidity an solvency of company its OK:

Only 9 young employees doing innovation in a vey dificult sector with financial goals in a good way.