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Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already suc
by lumost 5y ago
Looking at a company like $SNOW with a price to revenue multiplier of >100x, the core thesis rings true. Companies are being priced as if they have already succeeded beyond the expectations of all past companies in the space.
To make SNOW's valuation make sense you would need to assume that they can get to a profit of 2.6 Billion/year. This would put them squarely in the realm of hot, high growth stocks with a P/E of 30x. Put differently, SnowFlake's TAM must be able to support ~6 Billion in profit to keep a flat valuation and a P/E ratio of 13. Assuming they were able to offer the service while returning their full gross margin as profit would imply a revenue of 10 billion or a little over 16x revenue growth priced into the stock.
While SnowFlake is a great company with a great product. Is any enterprise software company really worth pricing an optimistic 16x revenue growth into?
- thedudeabides5 5y agoAs a competitor to SnowFlake I talk about this 100x price to sales in every meeting
- lumost 5y agoWhen I see SaaS multiples like this, I worry that it incentivizes consultancy behavior. SaaS is attractive as the R&D work gets amortized over many customers and many years. Customer acquisition costs are often looked at separately for this reason as the initial sales engineering/solutions consulting/sales work is done once and then the business makes profit on the back-end. At a 100:1 valuation to revenue multiplier, doing ad-hoc work to close deals becomes awfully appealing - likewise performing ad-hoc work to keep the revenue coming becomes very appealing. Pretty soon, you may find that the business has become a consulting organization masquerading as a SaaS as the platform isn't very compelling without the broader consulting business. A Consulting business typically maintains a 1.2x multiple on EBITDA earnings as it tends not to scale very well due to both execution quality challenges, and relatively low/squeezable margins.
- onlyrealcuzzo 5y ago16x over how many years? A lot of companies are growing 40%+ I don't think it's absurd to think AWS and GCP can keep rates like this up for another 4-5 years. If SNOW could do it for 8.5 years - that's ~16x growth. Still that seems way too optimistic for me - unless I'm purely speculating on greater fools willing to pay more.
- lumost 5y agoaye - effectively this says that SnowFlake will execute perfectly for 4 years, or slow to 40% growth for 8.5 years and will maintain/reach a healthy margin. For this, the market is willing to price this performance in today. Meanwhile a dollar placed in the S&P 500 would likely 2x over the same time frame. To see a return on a dollar placed into snowflake we'd need to start adding in assumptions like "SnowFlake doubles in revenue for the next 7 years reaching a revenue of 76 billion dollars per year in 2029, surpassing GCP, rivaling major cloud vendors".
- onlyrealcuzzo 5y agoWhy? Google's PE isn't going to drop to 13 with NRIRP and its current growth rate.
- lumost 5y agoGoogle has multiple high margin business lines which have grown rapidly for the last 2 decades. Snowflake operates in a specific competitive market, with a yet to be determined profit margin.
- onlyrealcuzzo 5y agoI mean - I agree. But who's to say people aren't willing to bet this as yet to be determined business ends up being the best business of them all?
- lumost 5y ago