Because that represents cumulative revenue growth in the range of 100%-150% over three years (revenue was "over $100 million" in 2014 [0]) and it's not difficult to get to a high DCF valuation by (over?)extrapolating exponential growth at those types of rates. The absurd P/E ratio is arguably less relevant because expenses scale well for SaaS businesses.
Slightly more cynical answer: Big companies like SAP are bad at innovating, but their shareholders want to see growth. They have access to plenty of cheap capital, and buying companies that are actually innovating is one way to grow. Qualtrics and their bankers know this, and it means that they have all the leverage and can demand a premium. (Qualtrics's management may have also needed a premium to convince them to go work for SAP. I wouldn't blame them.) Also, there's a principal-agent problem: SAP's shareholders might be better off if SAP just returned the capital to them through dividends or buybacks and let them buy Qualtrics shares themselves, either in the private markets or after an eventual IPO. But SAP's management would rather manage a bigger company than a smaller one, and it doesn't look good for them to effectively throw up their hands and say they're all out of ideas.
I genuinely believe that there's some truth to both explanations, but your guess as to their relative importance is as good as mine.
> how does someone decide on a price 26x higher than earnings?
That's 3,077x earnings. $2.6m vs $8b. 26x would be a great price in this market.
For the same reason Facebook paid a billion dollars for Instagram, with zero revenue (or Google & YouTube). Aggressive speculation on the future outcome (growth) of what they're buying. They're plausibly betting Qualtrics might be a $3b sales division some day, yielding $500m in profit, or similar. They're willing to pay up now for those hopeful future profits, to take them off the market before a competitor does or Qualtrics gets far larger and more expensive in the future. Definitely a very rich premium they're paying (from SAP's side, it's equivalent to two years of their after-tax profit).
Coming from experience with semiconductor companies years back, 3-4x earnings was a typical acquisition price. This speculation on growth is very interesting to me.
Recurring SaaS revenue with good retention is highly predictable with 80-90% gross margins and requires essentially no CapEx to scale, which is in stark contrast to the semi world.
You are also seeing YoY growth that can be orders of magnitude greater
No one uses earnings multiples in this universe given that a great deal of venture funded SaaS companies have negative EBITDA. Multiples of training GAAP revenue or current ARR runrate are what's salient
Slightly more cynical answer: Big companies like SAP are bad at innovating, but their shareholders want to see growth. They have access to plenty of cheap capital, and buying companies that are actually innovating is one way to grow. Qualtrics and their bankers know this, and it means that they have all the leverage and can demand a premium. (Qualtrics's management may have also needed a premium to convince them to go work for SAP. I wouldn't blame them.) Also, there's a principal-agent problem: SAP's shareholders might be better off if SAP just returned the capital to them through dividends or buybacks and let them buy Qualtrics shares themselves, either in the private markets or after an eventual IPO. But SAP's management would rather manage a bigger company than a smaller one, and it doesn't look good for them to effectively throw up their hands and say they're all out of ideas.
I genuinely believe that there's some truth to both explanations, but your guess as to their relative importance is as good as mine.
[0] https://www.businessinsider.com/qualtrics-becomes-1-billion-...