Cloud-based data warehousing specialist Snowflake made history this week with the largest software IPO ever. The offering enjoyed extreme demand from investors, potentially due to the fact that Warren Buffett's Berkshire Hathaway made the rare move of investing in a tech IPO via a concurrent private placement.
Snowflake was already boasting incredibly lofty valuation multiples based on the offering price ($120) alone. With shares more than doubling on the first day of trading, growth expectations are now in the stratosphere. Can Snowflake live up to those hopes?
Image source: Getty Images.
In a valuation league of its own
Like most IPOs, Snowflake shares will be extremely volatile as the market attempts price discovery, so I'll be going off the first day's close. At the first day's closing price of nearly $254, Snowflake was boasting an astounding market cap of $70 billion. For perspective, that's over 5.5 times the $12.4 billion valuation that the company fetched in a Series G funding round in February -- just seven months ago.
At $70 billion, Snowflake is trading at nearly 174 times trailing-12-month (TTM) sales of $402.7 million. The offering price represented a price-to-sales ratio of 82.4. Let's compare that valuation multiple with some other high-flying enterprise tech stocks.
|
Company |
TTM Revenue |
P/S Ratio |
|---|---|---|
|
Snowflake (SNOW 2.53%) |
$402.7 million |
173.8 |
|
Zoom Video (ZM 0.05%) |
$1.35 billion |
83.8 |
|
MongoDB (MDB 0.81%) |
$501.6 million |
24 |
|
Fastly (FSLY -0.47%) |
$246.3 million |
35.2 |
|
CrowdStrike (CRWD -0.68%) |
$654.3 million |
41.7 |
|
Okta (OKTA -0.65%) |
$703.7 million |
34.6 |
|
Zscaler (ZS 0.30%) |
$431.3 million |
39.8 |
Data source: Yahoo! Finance and author's calculations.
If you thought Zoom was expensive (and it is), Snowflake is in a whole other league. Most of these peer companies have somewhat comparable top lines but trade at a fraction of Snowflake's sales multiple. Still, credit where it's due: Many of Snowflake's growth metrics are undeniably impressive.
The company's net revenue retention rate of 158% leaves its peers in the dust, remaining performance obligation (RPO) more than tripled to $688.2 million in the first half of this fiscal year, and customers spending more than $1 million annually has more than doubled to 56. Snowflake is also growing faster than most of these comparable companies, save for Zoom, which saw revenue skyrocket by 355% last quarter.
Spending money to make money
However, Snowflake has been spending extravagantly to generate that growth, with sales and marketing expenses exceeding revenue for most of the past two years.
Data source: Prospectus. Chart by author. Fiscal quarters shown.
It's common for enterprise software companies to have high sales costs as a percentage of revenue since sales cycles are long and complex -- 40% to 50% is not unheard of -- but topping 100% of revenue is notable.
|
Company |
Revenue Growth (MRQ) |
Sales and Marketing as a Percentage of Revenue (MRQ) |
|---|---|---|
|
Snowflake |
121% |
70% |
|
Zoom |
355% |
24% |
|
MongoDB |
39% |
54% |
|
Fastly |
62% |
33% |
|
CrowdStrike |
84% |
48% |
|
Okta |
43% |
49% |
|
Zscaler |
46% |
71% |
Data source: SEC filings. MRQ = most recent quarter.
It's encouraging that Snowflake is starting to pull back on sales and marketing while still being able to post enviable growth and revenue retention metrics. CEO Frank Slootman told CNBC this week that it's not just another tech company that will pursue growth at all costs. The $70 billion question will be whether Snowflake can maintain those growth rates in the quarters ahead while keeping costs in check.
If not, the company might have a hard time justifying its valuation to investors.
