How to Invest in Databricks

Databricks is one of the most widely followed and highly valued companies in the start-up world. Its Lakehouse platform, which makes it easier for companies to access and analyze their data, is driving its growth.

Lakehouse is a cloud-based platform used by data scientists and analysts. It enables companies to keep their data stored on third-party cloud servers like Amazon (AMZN -1.14%) Web Services. Companies looking to use artificial intelligence (AI) increasingly use the company's platform.

With AI technology accelerating, Databricks should have much more growth ahead of it. Given that growth potential, many investors can't wait to get their hands on its shares.

Here's a look at how to invest in Databricks and some factors to consider when evaluating the company.

Is Databricks publicly traded?

Is Databricks publicly traded?

As of late 2023, Databricks wasn't a publicly traded company. Investors can't currently buy the company's shares on a stock exchange with their brokerage accounts.

Will Databricks IPO?

Will Databricks have an IPO?

Databricks didn't have an initial public offering (IPO) on the calendar as of late 2023. According to a report by The Information in late 2022, the company told its investors that it planned to launch an IPO by the summer of 2023. However, Databricks' CEO told Bloomberg in June 2023 that those plans stalled because the "markets are shut down."

Investors might want to rein in their expectations before getting too excited about a potential Databricks IPO. Databricks has considered going public in the past. The company was on a path to complete an IPO in 2021 after its last private funding round. That would have been a prime time to go public due to sky-high investor interest in technology start-ups. With investor appetite for tech stocks having cooled since then, the company may remain private until the IPO market heats back up.

How to invest

How to invest in Databricks

Even though Databricks isn't a publicly traded company, some investors can still buy an interest in its upside potential through a secondary platform like EquityBee or Forge Global (NASDAQ:FRGE). The online platforms allow accredited investors (i.e., those with a high net worth or a high income) to invest in venture capital-backed start-ups.

Accredited investors on EquityBee can fund employee stock options. In exchange, they will receive a percentage of the option's sale price when the company completes a liquidity event, like a sale or an IPO. Databricks is the third-most popular start-up with investors on the EquityBee platform.

Meanwhile, anyone can gain exposure to Databricks through the Fundrise Innovation Fund. The venture capital fund is open to all investors. It also has a very low investment minimum (about $10 per share). The fund invested $25 million into Databricks. It's one of several pre-IPO companies held by the fund, which also owns shares of Canva.

Alternatives

Alternative options to investing in Databricks

There are alternative investment options for people who aren't accredited investors and want to gain upside exposure to the fast-growing cloud data sector before Databricks' IPO. They can invest in a publicly traded database company that competes with Databricks. Here are a couple of alternative options investors might want to consider:

1. Snowflake (SNOW -0.26%): Snowflake's data cloud enables customers to store, process, and analyze data faster, more easily, and with greater flexibility than legacy solutions.
2. MongoDB (MDB -2.1%): MongoDB is a document database. Its flexible approach enables clients to start building applications without spending time configuring their database.

Should I invest?

Should I invest in Databricks?

While most investors can't invest in Databricks yet, here are some factors to consider before investing in the company if it launches an IPO.

Profitability

Is Databricks profitable?

According to several sources, Databricks isn't profitable. That's common for a technology company still in an early growth phase. It often takes new technology companies years to reach profitability because they invest heavily in innovation and scaling up their business.

Even some of Databricks' larger public competitors aren't yet profitable. For example, Snowflake reported a net loss of almost $800 million in its 2023 fiscal year, according to generally accepted accounting principles (GAAP). However, the company is profitable on a non-GAAP (adjusted) basis, generating $95.3 million of non-GAAP net income in fiscal 2023. It's also free-cash-flow positive. The company produced $520.4 million of adjusted free cash flow in its 2023 fiscal year, converting 25% of its revenue into adjusted free cash flow. The cash-rich company (Snowflake had about $4 billion in cash, equivalents, and short-term investments on its balance sheet and no debt) has more money than it needs to expand the business. The extra cash allowed it to authorize a $2 billion share repurchase program in early 2023.

MongoDB also posted a GAAP operating loss in fiscal 2023 of $345.4 million. While the company was profitable on a non-GAAP basis (MongoDB reported $64.7 million of non-GAAP net income), its free cash flow was negative $24.7 million for the year.

Revenue

Databricks' revenue

Databricks' annual recurring revenue (ARR) run rate crossed the $1.5 billion milestone in 2023. The company is increasing revenue at a rapid clip: It surged 50% in the past year.

Databricks is one of many data software companies growing revenue briskly. Snowflake's revenue soared 69% in its 2023 fiscal year to almost $2.1 billion. Meanwhile, MongoDB's total revenue jumped 47% to almost $1.3 billion.

Valuation

Databricks' valuation

Databricks last raised money from private investors in September 2023. The funding round raised $500 million at a $43 billion valuation. That's a $5 billion increase since its last funding round in 2021.

To put Databricks' valuation into context, Snowflake had an almost $60 billion market capitalization in late 2023, while MongoDB's was almost $30 billion. Given that those database companies generate more revenue, are growing briskly, and are profitable on a non-GAAP basis, Databricks had a much richer valuation multiple than those more mature publicly traded companies.

ETF options

ETFs with exposure to Databricks

Exchange-traded funds (ETFs) can be a great way to gain passive exposure to a company without directly owning shares. But since it's not publicly traded, investors can't use an ETF to gain passive exposure to Databricks stock.

However, they can invest in ETFs to capitalize on the same market trends as Databricks. Here are two ETFs to consider:

• Spear Alpha ETF (NYSEMKT:SPRX): This ETF invests in companies benefiting from breakthrough technology trends, like AI. Notable holdings include Snowflake and Nvidia (NVDA 0.76%), the latter of which is an investor in Databricks. The fund has a 0.75% ETF expense ratio.
• TrueShares Technology, AI & Deep Learning ETF (LRNZ -0.21%): This fund focuses on holding companies it believes possess innovative AI and deep learning solutions. It also counts Snowflake and Nvidia among its largest holdings. The ETF has a 0.69% expense ratio.

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Bottom line

The bottom line on investing in Databricks

Databricks is one of the most exciting up-and-coming companies. It's increasing revenue rapidly as more companies use Lakehouse to manage their data, especially for AI applications. It's a highly anticipated IPO.

However, since it's not yet public, investors can take their time to fully analyze the company before buying shares. They can also consider some of its already-public competitors like Snowflake and MongoDB, which are also growing fast and are closer to being profitable. They could be better investments over the long term, especially if Databricks launches at a rich valuation.

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