The Rule of 40 Stocks List - Updated daily (2024)

FAQs

What is the current rule of 40 companies? ›

The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a rate that's sustainable, whereas companies below 40% may face cash flow or liquidity issues.

It should be noted that the Rule of 40 only applies to SaaS businesses. This is because software companies that leverage their services to other businesses are known to manage higher margins between 70% and 90%. However, this rule of thumb can still be applied as a useful benchmark for other subscription companies.

The Rule of 40 states that, at scale, the combined value of revenue growth rate and profit margin should exceed 40% for healthy SaaS companies. The Rule of 40 – popularized by Brad Feld – states that an SaaS company's revenue growth rate plus profit margin should be equal to or exceed 40%.

What is the Rule of 40? The Rule of 40 is a popular “back of the envelope” calculation used to assess the value of public SaaS companies based on the trade-off between growth and profitability. Companies will meet the Rule of 40 if year-over-year revenue growth rate plus profitability margin equals 40%.

The rule of 40 formula requires just two inputs, growth and profit margin. To calculate this metric, you simply add your growth in percentage terms plus your profit margin. For example, if your revenue growth is 15% and your profit margin is 20%, your rule of 40 number is 35% (15 + 20) which is below the 40% target.

According to Techstars Co-founder Brad Feld in 2015, the Rule of 40 says that a healthy SaaS company has a combined growth rate and profit margin of 40% or more. For example, you could grow 40% quarter-over-quarter with a profit margin of 0%.

The Rule states that the sum of a SaaS company's annual revenue growth rate and profit margin should equal or exceed 40%. Calculating the Rule of 40 is straightforward, as it only requires adding the revenue growth rate and profit margin figures.

Weighted Rule of 40 = (1.33 * Revenue Growth) + (0.67 * EBITDA Margin) This new weighting aligns with the increased focus on growth, particularly for smaller SaaS companies, prioritizing growth over profitability as they work to achieve scale.

However, as long as you are burning money to drive growth, the Rule of Negative 40 is a much better metric. Here's why: For every dollar of additional revenue, you are adding, at a minimum, 6x that in additional company enterprise value, given the low end of SaaS valuations.

What is the 80% rule in day trading? ›

Definition of '80% Rule'

The 80% Rule is a Market Profile concept and strategy. If the market opens (or moves outside of the value area ) and then moves back into the value area for two consecutive 30-min-bars, then the 80% rule states that there is a high probability of completely filling the value area.

Popularized by venture capitalist Brad Feld, the Rule of 40 describes a benchmark metric popular among SaaS founders and investors. The Rule of 40 states that your growth rate and your profit margin should add up to at least 40%.

Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.

According to the rule, the S&P 500 ends the year positive if it ends the first five trading days of the year positive. It has worked between 80 to 90 percent of the time.

Valuation Discount: Companies with a Rule of 40 score below 40% might receive a valuation discount compared to companies that meet or exceed the benchmark. This discount reflects the perceived higher risk associated with the company's ability to achieve sustainable profitability and could result in a lower valuation.

The Weighted Rule of 40

The calculation for the weighted rule is (1.33 x growth in revenue) x (0.67 x profit margin). For instance, if a hypothetical company has a 12% growth in revenue and a 27% profit margin, it would have a score of 15.96 + 18.09 = 34.02% using the weighted rule.

It states that a company's combined growth rate and profit margin should equal or exceed 40%. In simpler terms, if you're running a SaaS startup or in charge of the marketing engine, this rule is your litmus test for balancing rapid growth with sustainable profitability.

The Rule of 40 is calculated as a sum of the company's growth rate and profitability. As the argument goes, SaaS companies can easily choose between revenue and growth, so fast growth compensates for low profitability and vice versa. A healthy SaaS company is supposed to score above 40 on this metric.

JPMorgan analyst Tien-Tsin Huang said Block could set its Rule of 40 targets to come in earlier than expected. The rule of 40 references sustainable profits with revenue growth and profit margins over the 40% level when combined. The analyst has an Overweight rating and $90 price target.