Divestor

I have been busy looking at the entrails of the various publicly traded software-as-a-service companies.

One thing that strikes out at me is the price to sales (or price to revenues) ratio.

Intuitively speaking, let’s say your market cap is $10 and you make $1 in sales a year.

Even if your cost of sales, G&A, R&D and the like is zero, the most profitability you can have as a company is a 10x P/E.

Of course 100% profitability will never will be the case – even if the company has completely outsourced its sales functions and just took a royalty on its product or intellectual property and had zero R&D function, there will always be costs associated with obtaining revenues. Of course, the “stripped down to taking royalties” company will be a calculation about the residual future demand and sales of said products.

While Boston Pizza Royalties (TSX: BPF.un) is as far away as a software-as-a-service company as it gets, the valuation concept is similar – BPF.un takes a 4% slice of every dollar of revenues that its franchises generate. The trust has zero employees, and in 2025, the trust’s administrative expenses was about 3% of revenues. The trust itself has some leverage expenses and is subject to income taxes payable at the trust entity level. When baking in all of these other expenses, they are still able to retain 53% of its revenues after-taxes which flow to the unitholders.

Based off of this, the market is giving BPF.un an enterprise value-to-sales (EV-to-royalties) ratio valuation of about 13 times. This is a ceiling, given that it is very unlikely that Boston Pizza will miraculously proceed to monopolize the restaurant scene in Canada and extract a disproportionate amount of pricing power – they are engaged in a highly competitive and mature industry with limited opportunities for growth.

Back to the SaaS side, we look at two other companies that are generally considered unassailable in their domains – Microsoft and Autodesk (AutoCAD is not going to get vibe-coded out of existence). Microsoft’s EV/S number is about 9.1x, while Autodesk is 6.4x. Both companies are far from being “royalty-like” in that they have huge operations, staffs, supports, R&D, etc.

Synopsys (Nasdaq: SNPS) is not exactly a household name, but their software is generally regarded as the industry leader in semiconductor design, has a EV/S of 10.5x. They are even less likely than Autodesk to get vibe-coded, and their valuation shows it.

One advantage of using EV/S as a lens is that it sidesteps the distortion caused by stock-based compensation, which is pervasive in software (particularly among newer companies) and can be a genuine pain to normalize across peers when trying to make apples-to-apples earnings comparisons.

Now for the more vulnerable end of the spectrum. Adobe (Nasdaq: ADBE) is currently trading at approximately 3.7x EV/S. Constellation Software (TSX: CSU), after losing over half its market capitalization in the past year, is roughly 3.3x.

If the market perceives a particular company’s software offerings as less defensible against AI, the EV/S ratio will continue to compress. Conversely, if you believe Adobe’s product suite has the same long-term survivability as Autodesk’s, it is not unreasonable to think its EV/S ratio should rise in the direction of Autodesk’s.

This analysis is very broad brushed, a view from 100,000 feet. But as a first-pass filter for what the market currently believes about the durability of a given software franchise, it is hard to beat for simplicity.