# Evaluating High-Growth [SaaS](/guides/evaluating-saas-stocks-rule-of-40) Stocks: The Rule of 40, NRR, and Real Company Data
Data as of August 2026. Sources: SEC EDGAR 10-K filings, company IR. Educational purposes only.---
The Problem With Simple Revenue Multiples for SaaS
Traditional equity valuation metrics (P/E ratios, EV/EBITDA) poorly fit early- or mid-stage SaaS companies because these companies intentionally sacrifice current profitability to maximize growth. A company growing 40% annually and burning cash may be worth more than a profitable one growing 5%.
This creates an investor problem: how do you compare companies across different growth/profitability tradeoffs?
The two frameworks that address this most directly are the Rule of 40 and Net Revenue Retention (NRR).
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The Rule of 40: Definition and Origin
The Rule of 40 states that a healthy SaaS company's Revenue Growth Rate (%) plus Profit Margin (%) should equal or exceed 40%.
Coinaged by: Venture capitalist Brad Feld in a blog post on February 3, 2015, titled "The Rule of 40% For a Healthy SaaS Company." ([Original post: feld.com](https://feld.com/archives/2015/02/rule-40-healthy-saas-company.html)) Formula:> Rule of 40 Score = Revenue Growth Rate (YoY) + FCF Margin (or Operating Margin)
Why FCF margin, not GAAP operating margin? GAAP operating margin for SaaS companies is heavily distorted by stock-based compensation (SBC) — which is a real cost but non-cash. Investors typically use non-GAAP FCF margin or non-GAAP operating margin (ex-SBC) for Rule of 40 calculations, since these better reflect the true cash economics of the business. Threshold interpretation:- > 60: Exceptional; indicates the company is simultaneously growing fast and generating substantial cash
- 40–60: Healthy; the classic "Rule of 40 pass"
- 20–40: Marginal; growth or profitability concerns
- < 20: Requires scrutiny; likely burning cash without compensating growth
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Applying Rule of 40 to Real Companies
Rather than hypothetical examples, here are calculations using actual public company data from SEC filings.
[Datadog](/stocks/DDOG) (DDOG)
- FY2025 Revenue: $3.43 billion (+28% YoY) — [Source: Datadog SEC EDGAR CIK 0001561550](https://www.sec.gov/edgar/browse/?CIK=1561550)
- Non-GAAP FCF Margin: approximately 25–33%
- Rule of 40 Score: approximately 53–61 ✓ (strong pass)
- Interpretation: Datadog maintains Rule of 40 above 50 even as it scales, a difficult feat. This reflects both sustained above-market revenue growth and improving cash flow as the cost base matures.
[Salesforce](/stocks/CRM) (CRM)
- FY2026 (ended Jan 31, 2026): Revenue = $41.5 billion (+10% YoY); GAAP Operating Margin = approximately 20% — [Source: Salesforce Form 10-K, SEC EDGAR CIK 0001108524](https://www.sec.gov/ix?doc=/Archives/edgar/data/1108524/000110852425000011/crm-20250131.htm)
- Rule of 40 Score (GAAP): approximately 30 — below threshold on GAAP basis
- Rule of 40 Score (Non-GAAP, ex-SBC): approximately ~40–45 — passes on non-GAAP basis
- Interpretation: Salesforce illustrates why the choice of margin definition matters. At $41.5B+ in revenue, sustaining high growth is structurally harder — Salesforce is now in "mature growth" territory where FCF generation and margin expansion matter more than growth rate alone.
[ServiceNow](/stocks/NOW) (NOW)
- FY2025: Subscription Revenue Growth > 20% YoY; FCF Margin = approximately 34.5% — [Source: ServiceNow SEC EDGAR CIK 0001370946](https://www.sec.gov/edgar/searchedgar/companysearch)
- Rule of 40 Score: approximately 54–55 — strong pass
- Interpretation: ServiceNow's score reflects the high-value enterprise workflow automation category: large initial contracts, high stickiness (government agencies, large enterprises), and strong upsell of modules onto the Now Platform.
[Snowflake](/stocks/SNOW) (SNOW)
- Most Recent NRR: 126% — [Source: Snowflake SEC EDGAR CIK 0001640147](https://www.sec.gov/edgar/browse/?CIK=1640147)
- Revenue growth has decelerated from hyper-growth (300%+ in FY2021) toward more normalized rates (~25–30% by FY2025)
- Interpretation: Snowflake is the clearest example of a company transitioning from growth-investor to quality-investor focus. NRR of 126% means existing customers are growing their Snowflake spend by 26% annually even without adding new customers — a very high-quality retention signal.
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Net Revenue Retention (NRR): The Most Revealing SaaS Metric
NRR measures what happens to revenue from your existing customers over 12 months, accounting for:
- Expansion (upsells, additional modules, increased usage)
- Contraction (downgrades, reduced licenses)
- Churn (cancellations)
$$\text{NRR} = \frac{\text{Beginning ARR} + \text{Expansion} - \text{Contraction} - \text{Churn}}{\text{Beginning ARR}} \times 100$$
Snowflake defines NRR precisely this way in the "Key Business Metrics" section of their Form 10-K ([Snowflake EDGAR filings](https://www.sec.gov/edgar/browse/?CIK=1640147)).
NRR benchmark framework (derived from Bessemer Venture Partners SaaS benchmarking, [BVP Atlas](https://www.bvp.com/atlas)):| NRR | Category | Interpretation |
|---|---|---|
| **> 120%** | Best-in-class | Rare; indicates strong product-market fit and upsell motion |
| **110–120%** | Strong | Healthy enterprise SaaS with active expansion |
| **100–110%** | Acceptable | Expansion approximately offsets churn; needs monitoring |
| **< 100%** | Contraction | More revenue leaving than staying — major red flag |
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Where to Find the Data: SEC EDGAR
All public SaaS companies file annual 10-K reports with the SEC disclosing ARR, NRR, and Rule of 40 components. The central search portal is:
SEC EDGAR Company Search: [https://www.sec.gov/edgar/searchedgar/companysearch](https://www.sec.gov/edgar/searchedgar/companysearch)In 10-K filings, look for:
- "Key Business Metrics" or "Key Operating Metrics" sections — this is where NRR, ARR, and customer counts are disclosed
- MD&A (Management Discussion & Analysis) — revenue growth rates and operating leverage discussion
- Non-GAAP Reconciliation tables — typically in the supplemental [financials](/guides/bank-earnings-nim-credit-quality-analysis), showing GAAP → Non-GAAP adjustments for SBC
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Valuation Multiples: How Rule of 40 Ties to Price
In the post-2021 rate normalization environment, investors have re-weighted the importance of profitability vs. growth. The market has empirically shown that Rule of 40 score correlates with EV/NTM Revenue multiples — companies with scores > 50 trade at significant premiums to those scoring 20–30.
However, these multiples are not static — they are interest-rate sensitive (see [FOMC Rate Decisions Guide](/guides/fomc-rate-decision-equity-impact)). In a low-rate environment, 15x+ NTM revenue for a 50%+ Rule of 40 company may be appropriate. In a high-real-rate environment, the same company may only warrant 10–12x. This compression drove the 2022 SaaS drawdown and the subsequent re-rating.---
Structural Risks in SaaS Investing
Platform consolidation risk: Large platform vendors (Salesforce, ServiceNow, [Microsoft](/stocks/MSFT)) continuously expand their product surface into areas historically occupied by point-solution SaaS companies. A vendor selling standalone field-service management software faces potential displacement when Salesforce or ServiceNow releases an equivalent module bundled with the existing platform subscription. LTV/CAC deterioration: As a SaaS market matures, customer acquisition costs tend to rise (more competitors, more expensive sales cycles) while lifetime value may compress (shorter contracts, more price negotiation). Monitoring changes in CAC efficiency over time — usually disclosed through sales and marketing expenses as a % of revenue — is important. AI disruption to traditional SaaS models: Large language models are beginning to commoditize certain categories of SaaS (basic CRM workflows, simple document management). Companies whose value proposition is fundamentally "storing and displaying data" rather than "deep workflow automation" are more exposed to AI-driven substitution.---
Related Guides and Catalayer Content
- Guide: [Next-Gen Cybersecurity Stocks: Zero Trust and AI Threat Detection]([cybersecurity](/guides/cybersecurity-stocks-zero-trust-ai)-stocks-zero-trust-ai) — Cybersecurity SaaS companies are evaluated on the same metrics
- Guide: [FOMC Rate Decisions: How Fed Policy Drives Equity Markets](/guides/fomc-rate-decision-equity-impact) — Rate regime drives SaaS valuation multiples
- Guide: [The Economics of AI Hyperscalers: CapEx Trends](/guides/ai-hyperscaler-capex-infrastructure-winners) — Hyperscalers compete with SaaS in some categories
- Topic: [Software & Cloud]([cloud](/guides/ai-hyperscaler-capex-infrastructure-winners)) — Real-time coverage
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Primary Sources
- [Brad Feld — Rule of 40% for SaaS (Original Post)](https://feld.com/archives/2015/02/rule-40-healthy-saas-company.html)
- [SEC EDGAR Company Search](https://www.sec.gov/edgar/searchedgar/companysearch)
- [Salesforce Form 10-K — SEC EDGAR CIK 0001108524](https://www.sec.gov/ix?doc=/Archives/edgar/data/1108524/000110852425000011/crm-20250131.htm)
- [Snowflake Inc. SEC EDGAR — CIK 0001640147](https://www.sec.gov/edgar/browse/?CIK=1640147)
- [Datadog SEC EDGAR — CIK 0001561550](https://www.sec.gov/edgar/browse/?CIK=1561550)
- [ServiceNow SEC EDGAR — CIK 0001370946](https://www.sec.gov/edgar/searchedgar/companysearch)
- [Bessemer Venture Partners State of the Cloud Report](https://www.bvp.com/atlas)
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Disclaimer: This guide is for informational and educational purposes only. All financial figures are from public SEC filings and company disclosures; verify directly with current 10-K filings before relying on them. This is not investment advice.