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How Are These 2020 IPOs Doing?

By Brian Feroldi - Updated Jan 27, 2021 at 3:03PM

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Following up on some superstar IPOs.

In this episode of Industry Focus: Tech, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to get folks up to speed on Palantir (PLTR 1.14%), Snowflake (SNOW -1.73%), Shift4 Payments (FOUR 2.45%), and Asana (ASAN -1.08%).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on January 22, 2021.

Dylan Lewis: It's Friday, January 22nd, and we're recapping some of the big IPOs of 2020. I'm your host Dylan Lewis, I'm joined by fool.com's royal reviewer of robotic non-regular rational reassessment, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, how is it going, my friend?

Lewis: [laughs] I can't complain. It's a beautiful day here in Washington, DC. I'm excited to get out and walk around a little bit, take some of that sun and I feel like I've been a little hermetic recently and I'm looking forward to getting out and enjoying the day a little bit. How are you?

Feroldi: I'm doing great. I try and take a walk or bike ride or something every single day, even on terrible days, because like you, I work from home, which means I don't get out enough. So I try to force myself to do that.

Lewis: You need to create the commute. You really do. [laughs] I think we all need time to decompress and I found that I'm a much happier person when I step outside for 15 minutes after the work day and almost act as if I'm walking home. It puts me in a much better mindset, helps me separate the work life and the life life.

Feroldi: It's a great excuse to listen to a podcast too, like you said, it's a fake commute for ourselves.

Lewis: [laughs] Wink, wink, nudge, nudge, listeners. If you're having trouble finding time for us, just go for a walk. That's when I listen to most of the shows that I'm trying to catch up on. Brian, we are going to be recapping some of our own shows in a sense with this episode. We did so many S-1 shows looking at IPOs in 2020. It was really an embarrassment of riches for us, last year. There were so many companies that came public, so many really big names that people already knew and eagerly were waiting for. We sometimes have a habit though of doing that first show when there's all the excitement about the company, and then forgetting to check back in [laughs]. So today we are going to be doing that.

Feroldi: We actually had to edit our list. We had so many to actually choose from, we said we can't make this too long. So I have a feeling we're going to have to do another one of these in like a month or two.

Lewis: Oh, shoot. [laughs] Right? It's so nice when we have easy ideas and things that we know people are interested in. There's been so much enthusiasm in particular about the IPO markets in the past couple of years, just because they've been so many really good performers that have come out and put up some stellar returns for investors in their first year or two on the public exchanges. We're going to be running through four names in particular. But of course, if we wind up leaving anything hanging and folks want to hear about a specific company that we've talked about in the past, IndustryFocus@fool.com, right, Brian? You can get us there.

Feroldi: That's right. We will get to it, because we had some great companies that we had to leave off the list.

Lewis: The first one on the list for us is Asana. We talked about this one a little while ago. Shocker, guys, it's a SaaS company, and Brian did a lot of the heavy lifting for the homework on this one.

Feroldi: Asana is a company that is focused on work management. They provide a software platform that provides real-time planning and road-mapping for everybody in an organization. It helps to keep everybody on the same page, reducing the need for meetings, for unproductive time looking for updates. It's used for everything across the organization from product launches, marketing campaigns, to organization-wide goal settings. It allows people to share unstructured work and data with each other very easily in one spot. They have deployed a freemium model, like we've seen with many other successful SaaS companies. So, you can go on to their platform and get up and running easily. If you decide that the product has worked for you, you can pay for premium products and we're seeing a lot of companies do just that.

Lewis: Yeah, Brian. I think it's worth emphasizing that this is a space where a lot of companies have seen a lot of success. Working in the enterprise space of software in particular has been just a wonderful market for so many businesses. But I think we're seeing the productivity side of software really start to blossom over the last couple of years. Part of it is, when all these other things go cloud, it only makes sense for the coordination tools that you use to also go cloud. Because we're increasingly working in more decentralized work environments.

Feroldi: That's exactly right. It's unproductive to spend time emailing each other, to have Zoom sessions with others just looking for updates. It's so much easier to just have one centralized repository where everybody keeps track of what they're working on. Managers can easily get updates on projects as they go along. To your point, we've seen so many large companies in particular really adopt this software in earnest. In the company's most recent quarterly report, which was their first since coming public, they've reported a 55% growth in revenue to $59 million, and they noted that they had 89,000 in total paying customers. What's interesting about that is customers on their platform that are spending more than $5,000 per year, that grew 80% this quarter, and customers who spend more than $50,000 per year, that grew 104%. We're clearly seeing a willingness of larger and larger companies willing to pay to use this software.

Lewis: Yeah, and one thing that we've hyped on plenty when we talked about this company was the pedigree of its leader, Dustin Moskovitz. It's worth reminding folks, for people that may not know, but Dustin Moskovitz, formerly at Facebook. One of the big names, certainly in the industry. This is his second act in a way. It's so different in some ways than what people know him for. But it also feels like it's at the intersection of where tech, SaaS, and company solutions are going.

Feroldi: He got the idea for this company during his time at Facebook, he noticed that he was spending an enormous amount of his personal time just looking for updates on projects. He felt that he had to find a better way. You're absolutely correct. He is the pedigree of pedigree when it comes to CEOs. I'm looking at his Glassdoor ratings right now, he has a 100% approval rating and there's more than 100 reviews in there. You can trust that number and the company itself gets 4.9 stars out of five. In their corporate presentations, they regularly tout these metrics and that they are a fabulous place to work.

Lewis: Yeah. So far, it's been a fabulous stock to own, Brian. Their performance, since going public, has been mighty strong even for folks who didn't buy the issuance price. Let's be honest, none of us are buying at issuance price. We're catching it on the first or second trade at best. The numbers have been good. Well, I think it's something around a 50% return from when they first went public.

Feroldi: The last I checked they were up 38% or so. I think the big reason why is people are still very interested in SaaS, the management team here is stellar and their first-quarter earnings report was good. One thing that we did call out on the show when we did it is this company, as a SaaS company, has some jaw-dropping margin. Its gross margin here is 88% already. That is huge. The number that we like to check with any SaaS company report is dollar-based net retention. Those numbers looked pretty good overall. The overall company was over 115%, meaning that the average customer spent 15% more with Asana this period when compared to the last. If you look at the bigger clients, again, they are swimming upstream within their own customer base. Their DBNR was 125%. Loved to see that. The rest of the margins, not so good, Dylan. This is something we called out in our show. This company is not focused on its bottomline at all right now, and that just comes through. On a GAAP basis, their quarterly net loss was $73 million. A lot of that is stock-based compensation. So, their adjusted net loss was $38 million or $0.34 per share. That did beat Wall Street's estimate. On a free cash flow basis. Not as bad, they burnt about $20 million in that free cash flow. They did give some pretty healthy guidance for the upcoming quarter. They're expecting 44% revenue growth for the upcoming quarter and 55% for the first year. I like it when companies do outperform expectations on their first earnings report and Asana definitely did.

Lewis: Yeah. I think we can't be too surprised by what we're seeing in terms of the financials, the further you get away from the revenue line. They only have about $200 million in trailing 12-month revenue. They're about a $6 billion business. I think any executive team would look at where they are and say, we got to go out and grab as much market as we can. We've got a software solution that even at this scale is high 80% gross margins. We know that we're going to be able to print money whenever we decide to. We just got to hit the scale where we have the customers that we want to have, expand our relationship with them over time.

Feroldi: That's a formula that we've seen work many times again, but they still have ways to go before they have reached enough scale to start producing profits. But so far, a good start.

Lewis: Yeah, and I think for them, they are in that space where it isn't hard to see a multibagger. We talk about it a lot, Brian, but the idea of valuation really comes into play when you are trying to project out what a business can become and what type of returns you need to wrap your head around, being realistic for a company. Being about a $6 billion business, it isn't inconceivable for them if they really nail their execution and they wind up growing the way they expect to and become what so many other companies have become in the enterprise software space, something that is measured in the tens of billions of dollars at some point. That's not hard math to do, as we're going to talk about with some of the other names on this list, the math gets a lot tougher. I think this is a business where people have gotten very used to multibagger type returns in the Software-as-a-Service space. This is one where it's not too hard to see that.

Feroldi: Totally agree. I always like to look at market cap, and to your point we've seen lots of companies reach $20 billion, $30 billion, $40 billion, or even above that range in the SaaS space. So, if they can keep this growth rate up and gradually improve their bottom-line margins, this could definitely be a multibagger from here.

Lewis: Brian, Asana's returns are nice and all. But this second stock blows them out of the water. That's Palantir up, by my count, 180% since even the regular investors like us were able to get their hands on the stock, even more so if you happen to be one of those people who scooped up shares at issuance price. I think it's like a forex on where they issued, which is wild because it's been less than a year. But I think it really speaks to how much hype behind this business and the expectations going into it. Palantir is one of those companies that even people who don't follow the private markets probably knew, Brian. It's one of those lore type companies that people have just been hearing about for such a long time.

Feroldi: Yeah. A controversial company, after that we talked about that in the S-1 show, founded by Peter Thiel who famously founded PayPal, and they definitely have built an interesting business for themselves. But to your point, I love seeing that the stock popped and that public investors were actually able to get a piece of that.

Lewis: Yeah, that's always nice. It's hard sometimes to look at the IPO returns and be like, "Well, wait a minute, you guys are calculating that based on issuance price," which no [laughs] one was able to realize. Let's be real here. But for folks unfamiliar with Palantir, this is a software business. It's focused on big data and big data analytics. What they are trying to do, not so much in the collection of data, but more in the making sense of data, helping people make decisions based on datasets, create intelligence from datasets, and really makes sense of what is largely unstructured data. That's what they do. The reason they're controversial is because of who they do that for. The easiest way to think about them is, if you took a tech company and made them a defense contractor. I think that's about as simple as it gets for who they are and what they do. They started out working in the intelligence community and that's really where they got their start. That's where most of their money is coming from, those types of contracts, though they are working to branch more and more into traditional enterprise customer relationships. Still something that is relatively small in the overall scheme of their topline. But they say it well, and I think this is one of the easiest ways to really summarize the bulk of their business. 'Our software is becoming the de facto operating system of the U.S. and ally defenses.' They called that out in the investor relation presentation, Brian. I think it's one of those businesses where it's very helpful to look at the investor presentation because, honestly, a lot of their relationships, they're cagey in describing them.

Feroldi: That is actually a pretty good sales pitch. This is a company that spent years developing its technology and obviously, they had to place a tremendous emphasis on security to land some of the big customers that they have over time. Getting them onboard takes a huge amount of effort, a huge amount of work upfront. But once they're in there and once you are cleared to work with say, the U.S. government, boy, is that going to be hard to dislodge you. As they move more into the private sector, it's nice to say, "Hey, governments trust us with their data, you should too."

Lewis: That's a really good case in point [laughs] for them to be able to point to. I think it's worth unpacking what that means for them in terms of their relationships, and also what their growth story looks like. Because when you have those types of incredibly precious, private, secure types of contracts, those take a very long time to develop. They take a very long time to both sell, but also to implement. That means that from a customer acquisition standpoint, you are working in pretty long cycles. One thing that management has addressed in some of their public comments since going public is that they are shortening those cycles a little bit. I think some of that is having worked with some really gold standard type companies and organizations. But that's going to be an ongoing challenge for them. I think as they work more and more in the commercial space, we'll probably see those periods shorten a little bit, but it's something that affects this business. The flip side of that, Brian, is they wind up with somewhat extended, predictable revenue cycles coming in because they are locking in multi-year contracts with a lot of their relationships.

Feroldi: I think one reason that this company went public was to get its name out there, and we've seen a lot of companies use coming public as a marketing event, to get their name out there, and this stock has been on fire. I know that the investment community has been talking about this company a lot. I'm sure that alone is helping it to reduce its sales cycle.

Lewis: I think that's right. I can't think of a better way to advertise something like this. To show your customers slide and just say, "This is who we're providing for. I think you can trust us." Particularly when you're operating in more sensitive stuff. To give people a sense of what some of the enterprise, what some of the commercial side of the business looks like. They called this out in the most recent earnings deck, but they did top five pharmaceutical companies using them to link data from more than 2,000 clinical trials in Foundry, which is one of their products. So, uncover trends across trials and securely analyze outcomes at a population level. They also specifically called out that in aerospace, customers signed the largest commercial deal they have ever done in their most recent quarter. This one being three months past. This was in the midst of a pandemic that of course, shook the entire aerospace industry. This is, I believe, a $300 million five-year contract. That was one of the big headlines coming out of their most recent earnings report. I think part of the reason why we saw the stock spike as much as we did, so much of the thesis, I think, is can we expand beyond what we've done so far? I think this becomes a business with a much larger total addressable market if they can prove out to the commercial space that they are worthy of their spend. It's interesting though, Brian, because I remember we were talking about this and then we were followed on Motley Fool Live by our colleague, Tim Beyers who said, one of the dangers with that is, if you are a secure software, the more ubiquitous you become by nature, the more exposed you are.

Feroldi: The more hackers want to get to you in particular. That's an excellent point. I think that one thing that we talked about on the S-1 show is that this company's growth rate might be a little bit lumpier than we would see with most SaaS companies just by the nature of their business. When their business model is essentially going out and landing these enormous clients, to your point, that aerospace customer, a $300 million deal in one client, that's definitely going to have an impact on your topline. Their growth rate might vary from quarter to quarter, so this is a company you really need to zoom out probably and look at six or even a year period to judge their results.

Lewis: That's part of the reason why when it comes to the IPOs, we often like to wait a couple of quarters, because you want to see where these year over year growth rates really smooth out to. In Palantir's case, the most recent quarter for them, 52% year over year growth, which is actually an acceleration from where they were in previous quarters at 49% and 43%. But they are guiding for something in the 30% range for this upcoming quarter. Part of that is at a particularly strong Q4 in 2019. But we know that growth gets harder as that denominator gets bigger, Brian, and I think it's going to be lumpy regardless. It's not going to be nearly as smooth as a lot of the SaaS companies that we look at. But they are also a business that's at a point where we would typically see things be lumpy. It makes it a little bit harder than I think usual to make sense of what to expect broadly for this business long-term. They're saying $1 billion in full year to revenue for the year, which helps us wrap our heads around that. But they could go out there and sign a couple of really big deals, and you're right back up into the 40s without having to think too hard about it.

Feroldi: That's right. To your point, about $1 billion a year in revenue, the company has performed so well and it's performing well again today. As we speak, it's up over 15% just today. This is a $56 billion business, Dylan, $56 billion. Again, estimated to do about $1 billion in sales. Holy cow, has this company's price to sales ratio been expanded over the last couple of months.

Lewis: It really has. I think some of that is the news that's come out, being able to ink some really big contracts. I think they call attention to the fact that the pandemic is happening and that hurt the aerospace industry, and yet even still, this customer was willing to sign this multi-year deal. That's a position of strength for them. As a business with 65% gross margins, they deserve a pretty healthy price to sales ratio, Brian, but we've seen it expand dramatically on what I think is good news, not outrageously good news.

Feroldi: Yeah, I would agree with you there. The company for me right now would be a little bit too hot to touch, but hats off to them for having a great public debut.

Lewis: Yeah, and I think it's an interesting business, one to watch because it's tech in a space that we typically don't see tech, which is just fun to explore. But in some ways, it reminds me of a company that I really love, and that's why I'm interested in it, and that's Axon. The nature of the business is similar where you're working in multiyear deals. You are providing in a space where it doesn't seem like there's another really popular provider. There are a lot of advantages to that. But they are also proving out of the market in a way that other businesses just don't have to do. So there are challenges there, but there's a really interesting opportunity as well.

Feroldi: Axon, if I recall, was your top stock for 2021 in the tech space. Dylan here, looking at the macro cap there, $10 billion. So, about one-sixth [laughs] the size of Palantir there.

Lewis: Although I don't think they have Palentir's margins [laughs] for what it's worth. [laughs] We're going to be bringing it back to a space that people are probably a little bit more familiar with this third stock and that is Shift4 Payments, Brian.

Feroldi: Yeah, this is a FinTech company that I think we somehow swept away from the monday show, and I'm glad we did because it's been a big winner for investors. This stock has more than doubled since its IPO. It's up about 114%. As a quick reminder, they are a FinTech that provides a range of payments and merchant solutions. So, they're like Square in a way. However, they have a very strong focus, at least initially, on the hospitality space. So restaurants, lodging, leisure space, they provide them with point-of-sale software. Then that software cannot only process payments, it can also provide them with all kinds of back office, things related to reporting, analytics, it can even help with things like social media management and marketing, as well as providing customers at restaurants with the ability to actually pay at the table. At the time of their IPO, they had more than 200,000 customers, including some very well-known companies like Caesars and Pebble Beach. The downside to that is with their focus on hotels and restaurants, those customers aren't exactly thriving in a COVID world. But despite that, Shift4 actually put up pretty decent results in its earnings reports as a public company. Payment volume through its network actually grew 20% in its most recent earnings report. That compares to an industry backdrop of a decline of 4%. So, Shift4 is taking market share.

Lewis: Yeah, and you love to see businesses that are continuing to succeed, even when there is a lot in their way. If there are a ton of hurdles in front of a business and they are still able to put up above industry growth, Brian, that's generally a pretty good sign.

Feroldi: Yeah, and as a reminder, this has been a pretty acquisitive company. Historically, they have used their size and their scale to acquire companies, to get their customers, as well as build on their features. We actually saw more of the same since they came public. They actually acquired a company called 3dcart, which the best description I can give is it looks like a Shopify-like competitor. It helps customers provide e-commerce tools to merchants. They have about 14,000 customers. So, this company continues to grow both organically and through acquisition.

Lewis: In some ways, Brian, this reminds me a little bit of a company called BlackLine. I don't know how familiar you are with them, but the payment space in the e-commerce space, there are a lot of players there. We talk about it all the time, there are so many different names in that space and a lot of really great winners that have come out of that space. But that also makes it hard to look at a business that is pretty small in the grand scheme of the industry, and see a path forward that looks successful. Yet, I think with them being so focused on one particular industry and serving it really well, being able to cater some of their needs in a way that a lot of the other providers might not be able to, that winds up being a pretty good offering. The reason I invoke BlackLine here is, it's accounting software, which sounds really boring, but it's been a great stock to own. It's because they are a great provider that makes all the reconciliation way easier down the line, and shareholders have been handsomely rewarded for that.

Feroldi: I've been a shareholder of BlackLine for many, many years. It's totally one of those hidden behind-the-scenes players. It's hard to get excited about accounting software, but BlackLine sure has been a fabulous long-term holding. So yeah, I agree with you. Having a hyper-focus, like Shift4 does, on an industry really lets you build out your products and services to that industry in a way that sometimes the big providers such as Square just can't. Clear signs that they are continuing to grow in their core market, which is great. Now, one thing I will note is even though their payment volume, Shift4's payment volume did grow up 20% at the time when the industry was going down 4%, the rest of their income statement didn't look as great. Gross revenue only grew 11%, and gross profit grew 11%. Not quite as fast as total payment volume. This company has been flirting with profitability and not for a couple of quarters. In the most recent quarter, they were not profitable. Their adjusted net loss was about $2 million. That's not a big deal in the grand scheme of things. At the quarter-end, this company had over $300 million in cash and they just raised even more post-quarter-end to really bolster up that balance sheet. The company is growing in a declining market and as its core customers recover, fingers crossed there, you could see this company's growth reaccelerating.

Lewis: Yeah. I could also see this being, in some ways, a differentiator. I mean, we have seen with the pandemic that businesses that were nimble and were relatively set up for where the industry is going, that's really online ordering, being able to do pick up, being able to do delivery fairly easily, having really robust e-commerce storefronts, all that stuff, that helps you out a lot. I think that that might be a lesson for a lot of people that are in the hospitality space, is to get online if you're not online, and to really work to have more integrated solutions that give you a much better lens into your business. The tech investments have paid off for so many players in businesses and industries that have otherwise struggled. I wouldn't be surprised as budgets start to come back for some businesses, if we see some heavy investment in the space.

Feroldi: That would be absolutely wonderful. Shift4 is definitely a position to take advantage of that. In fact, in their recent quarterly report, they did raise their guidance pretty substantially for their upcoming quarter. They were previously expecting, for example, about $6.7 billion in end-to-end payment volume, and they boosted that by over 10%. That obviously does great things for the rest of the income statement. For what it's worth, Wall Street is expecting some pretty toward growth from this company in 2021. Their current [...] is for 40% revenue growth and for a pretty significant return to profitability. There's a lot of exciting things happening at Shift4 right now.

Lewis: Another one that's perfectly in that mid-cap space, Brian, $5 billion business, [laughs] not so much for our final company on this list, and that's Snowflake, which I think probably needs a small introduction, not a huge introduction. I imagine a lot of people have heard about it at this point. That's because, I mean, Brian, it was probably the most hyped IPO of 2020. We talked about all the fanfare behind Palantir here, but Snowflake was perhaps an even bigger IPO.

Feroldi: The numbers that we saw pre-IPO for Snowflake were just jaw-dropping in so many ways. If memory serves, I think this is a company that was coming public at something like $100, $110 per share and Warren Buffett got in, which is interesting in its own right. But public investors never even got to sniff anywhere close to that price. This is one of those stocks that just pops over 100% on day one and just stayed in nosebleed territory till today.

Lewis: Yeah, it was a perfect storm of things that can send a share price high. I mean, this was already a business that folks in the tech industry were salivating over. It was one of the fastest-growing SaaS companies ever at public offering. When you have someone like Warren Buffett, who typically has said, you know what, tech is not my wheelhouse, I don't understand these businesses as well, I'm going to stay away, wind up taking a stake at IPO, even people that aren't necessarily tech followers are going to latch onto that and think that there's something special here. My hunch is that it's one of Buffett's lieutenants that made that pick, Brian. But that's just conjecture on my part. [laughs]

Feroldi: I would say that the odds are pretty darn good that that was going to happen and I forget what valuation this company came public at, probably somewhere around $30 billion, maybe even $40 billion, something like that. Even then at the time of IPO, their trailing revenue was not even $500 million. So Buffett, or Buffett's lieutenants, as you point out, roughly, still to buy at the IPO, this company was trading at 60 or 70 times sales at the IPO and then it doubled. That just shows you how nutty the valuation got.

Lewis: Yeah. A big part of that is this is viewed as one of those best-in-class businesses. We talk about it a lot, but you wind up paying a premium for companies that are truly head and shoulders above other companies in the space. Unfortunately, what it means is that the returns haven't been particularly good and granted it's only been public for a while. But compared to some of the other companies out there, just over double-digit, I think, returns since going public in the fall. For folks unfamiliar with this business, since we've built it up so much, Brian, [laughs] this is a business that is, in some ways similar to Palantir, it's all about data access, though it operates in a very different space when it comes to data. They are really providing a platform that helps companies access their data security anywhere. This is something that allows them to upload structured data and unstructured data and then make it universally accessible in the Cloud. I think one of the most important things with this business is like Roku, it is cloud-agnostic. One of the easiest ways to think about this company is it works with everybody. It doesn't have a favorite in the cloud space. So if you're using Google [Alphabet], if you're using AWS [Amazon], if you're using Microsoft, it plays nice with all three of them.

Feroldi: You can see how that would be a big advantage if you were the Chief Investment Officer at some large company. You don't necessarily want to be locked in and botch your entire business around one platform like AWS or Azure or Google Cloud. Snowflake makes it easy as you point out to transfer across many of those platforms so that you do have some ability and optionality in your future. I totally understand how that is an appealing prospect.

Lewis: I mean, just from a negotiation standpoint, [laughs] to be able to take what you have and walk is huge if you're a customer. I think the concern that you would have otherwise, is like, "Well, we're stuck." We've already built ourselves into this very sticky ecosystem and where else are we going to go? I think the value prop is pretty obvious, both from a functionality standpoint, but then also when you're thinking about just what it allows customers to do in terms of negotiation, in terms of pricing power, all that kind of stuff.

Feroldi: We have seen some of these even major platforms have occasional outages too. There's also a redundancy factor if, by some chance, Amazon Web Services isn't working like it wasn't a few weeks ago. It's nice to be able to know that there's even backups at a massive scale, if you do need your data accessible 100% of the time.

Lewis: They do some interesting things with how they allow data to be accessed. At core, what this is trying to do is avoid the issue of data silos, make data governance a little bit easier. But also, if you are someone who needs data access to be somewhat compartmentalized or to have data shared outside of an organization, you should be able to do that relatively easily with Snowflake on a conditional basis. I think, Brian, this is where we're going. If you're thinking about the interoperability of businesses, that makes sense to me. I think this is a space, admittedly, where I am starting to feel my feet off of the pool floor as [laughs] I start waiting into the deep end and the further and further I get into this, and this is why I love hearing Tim Beyers talk about this company. But when I hear so many people in this industry talk about how they are truly the best at what they do, that gives me confidence when I hear all these other buzzwords that I normally glaze over.

Feroldi: To me, when it comes to things like this, I'm always like, "This sounds great. Prove it to me with the numbers, show me that the revenue growth comes through and that your service really is being hyper adopted." Well, we have a couple of earnings reports to look at or at least one, and the number says yes, they are proving it.

Lewis: The staggering figure, I think in what we saw in the S-1, was their net revenue retention number. Out of the gate, that was an impressive number, Brian, 158% for the first six months of 2020. Then they went out and reported Q3 earnings, and it was up to 162%, which is just incredible, and that's the good one. We talk about it all the time, but that's the good one when we're talking about rates.

Feroldi: That's the one that includes churn or downgrades in selling. Yeah, that 162%, I believe is best-of-breed across all SaaS. I don't even think Zoom can touch that number.

Lewis: Yeah, that's the metric you can hang your hat on, even if you don't understand the tech behind the business, which is great because we need those things. We need those indicators as people who maybe don't have as deep of a technical knowledge. Something else that I think should probably give people a lot of confidence with this business is their RPO number is holding very steady as well. RPO is the amount of their contracted future revenue that has not yet been recognized. But you can basically look at it and say, "This is revenue that will be recognized in the future." It creates a look into what future quarters we're going to create for them financially. They posted RPO acceleration from their previous quarter at 240% year-over-year growth. Those are big numbers, and we talked about how the revenue base is so small for this company right now. Those numbers are why the valuation is so large for that business.

Feroldi: How do you value a company that is growing this fast, both organically and through its own customers? That RPO number is just insane, 240%. Another number here is that the number of customers that will spend more than $1 million on their product is now 65, that's more than double of the year-over-ago period. When it comes to revenue growth and customers, the company is knocking the cover off the ball.

Lewis: All told they're guiding for year-over-year revenue growth of 114%. The year-over-year growth rates will probably slide a bit as you get that denominator bigger and bigger. But my gosh, Brian, [laughs] more than a double. It creates a lot of problems when it comes to putting a reasonable valuation on the business. We talked about the idea of value investing sometimes, and it's weird to invoke value investing when we're talking about high-growth stocks. Because typically, people think like cigar-butt investing, where you're looking at multiples and you're seeing opportunities below market value. But I think we can also apply the lens of value investing to people or the market not fully appreciating the growth potential for a business. This might be one of those companies. I think that has to be the bull thesis if you're a shareholder.

Feroldi: Yeah, you are banking on more quarters like this happening for a couple of years, essentially, to justify the valuation. But yeah, to your point, my favorite type of investing is finding companies that are priced very, very highly, and the company executes so well over the next 10 years that it could have justified even a higher-price. Even though the business looks insanely expensive on any traditional valuation metric, it's still being undervalued. That's rare. That's really hard to find, but if you can find them, those can be some of the best businesses that you can buy.

Lewis: As we teed up, people tend to pay attention. When you start seeing numbers like we just laid out here before the stock debuted in the mid-to-low $200s issuance price, I think $120 or so, so that was a double. But it's gone through a crazy run. I think it was somewhere up in the mid $300s at one point over [laughs] the last six months. We are back to something that is a little bit more down to Earth. But even so, we're talking about an $80 billion business with under $500 million in trailing 12-month revenue. That is a very healthy sales multiple. You have to be pretty confident buying the stock that the growth is going to continue, and that it's going to be in the triple-digit, it's going to be in the very high double-digits.

Feroldi: Yeah, you're going to need 80% growth, I would say ,at least for quite some time to come anywhere close to justifying the valuation. I don't have a problem paying a huge price to sales multiple if I think that a company is going to grow at a very strong rate for a long period of time. The tricky part for me was a company like Snowflake is just the size of the business already. Given that prices of sales multiple, this is an $81 billion company. For the companies to, say, 10x from here, it would have to be scratching the surface of almost $1 trillion. I don't know the company or the opportunity well enough to say that's going to happen. I do know that I'm not going to bet against it, but boy, do I have a problem paying that high of a valuation when the market cap is already so huge.

Lewis: I remember we did our Motley Fool Live Award Show for our members live stream, and we had people submit what they thought would be the winners of all these different categories from 2020. Snowflake was an overwhelming submission for the best IPO of 2020. It wound up being the winner as our analysts voted on it as well, and I will reveal that here. But what Bill Mann made a very good comment on, he was saying like, "It was in a lot of ways, the most hyped, the most followed IPO, as returns go will not be the best IPO in 2020. There will probably be some sub $5 billion, sub $10 billion company that five, 10 years from now puts up way better returns than Snowflake." Not to say Snowflakes is a bad business, but you have to right-size your expectations when you are talking about a company that's already worth $80 billion.

Feroldi: That's why it's my favorite to look for high-growth companies that are trading at say under the $10 billion number, it's much easier for me to believe that those companies can 5X and 10x than a company of this size.

Lewis: I have this as a watchlist stock for me mostly, because even if I don't buy it, I need to be in the know on this, as someone who follows this industry and follows Cloud computing. But I think what gives me confidence that this business is probably going to be bigger in five, 10 years, is just the direction of Cloud in general, and the heavy, heavy investments that are going into Cloud if they are able to be a business that makes that easier for companies, we've seen how wildly successful AWS is. If that was a stand-alone business, Brian, you'd be a shareholder, right?

Feroldi: Totally, yeah. [laughs] If Amazon got broken up and it was forced apart, I would happily accept my Amazon Web Services shares. [laughs]

Lewis: There's so much money pouring into this space, and I think just generally, it's where we're going. That gives me a lot of confidence, particularly because, as we've talked about at length, they are truly it seems the best at what they do, and the numbers seem to back that up. I don't know that it's a position where I'd want a ton of my portfolio in it though.

Feroldi: Yeah, fair enough. But between these four, Dylan, would it be fair to say that Snowflake is your favorite?

Lewis: I was thinking about that and I don't own any. There are a couple that I'm interested in, and I'm planning on doing some buying in 2021, none of these are at the top of that list. I will say just because of what we talked about in terms of multibagger potential, I'm a little bit more interested in a company like Asana. Honestly, the margins are a huge part of that. [laughs] I can confess that. It's just so appealing when you have that much money left over to pay everything else. It isn't hard for me to see that company being quite profitable in the future, and it's still small enough that there's a lot of reward there for shareholders. I'm trying to focus more and more on my portfolio in sub $10 billion companies. For that reason, Palantir and Snowflake are a little bit less interesting to me, but I think they are both quality businesses. What about you, Brian?

Feroldi: I'm in the exact same boat with you. Asana, I am not thrilled with the bottomline losses, but there's a lot to like about the business. I think the product is very interesting. It's very sticky. I think the leadership has a ridiculously high pedigree. I love the Glassdoor ratings, and it's really hard to not like an 88% gross margin, to your point. It does not take a leap of imagination to think a couple of more years of very fast revenue growth, plus potential is even rising margins all the way from 88%. Not hard to imagine this business is becoming wildly profitable in just a few years.

Lewis: That's the fun of it. We get to guess, and we get to see it play out many times over with all the things that we own or might own, Brian.

Feroldi: That's right. This one is definitely going back on my radar. The tricky thing about doing so many shows that we do, it's hard to keep track of everything. These reviews shows are very critical for me. Thank you for the reminder.

Lewis: We do this for you, listeners, but really, we do this for ourselves as well. [laughs] Brian, thanks so much for joining me on today's show.

Feroldi: Have a great weekend, Dylan.

Lewis: You too. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey," shoot us an email at industryfocus@fool.com or you can tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell stocks based solely on what you hear. Thanks to Tim Sparks for working behind the glass today, and thank you for listening. Until next time, Fool on!

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Stocks Mentioned

Palantir Technologies Inc. Stock Quote
Palantir Technologies Inc.
PLTR
$8.13 (1.14%) $0.09
Axon Enterprise Stock Quote
Axon Enterprise
AXON
$95.30 (-0.15%) $0.14
Shift4 Payments, Inc. Stock Quote
Shift4 Payments, Inc.
FOUR
$45.77 (2.45%) $1.09
Snowflake Inc. Stock Quote
Snowflake Inc.
SNOW
$142.01 (-1.73%) $-2.50
Asana, Inc. Stock Quote
Asana, Inc.
ASAN
$21.57 (-1.08%) $0.23

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