Snowflake’s melting market capitalization reflects investors’ overly lofty expectations. Its share price fell by nearly a fifth on Thursday even though the $65 billion data warehouse firm said fourth-quarter revenue doubled. A solid business, with cash from operations easily covering capital expenditures, means slight missteps present a valuation conundrum, not an existential threat.
Fast growing firms are hard to value, but the market’s ardor is cooling. Snowflake thinks revenue will rise by two-thirds next year, to $1.9 billion. Now assume sales grow 50% annually for five years and the company will enjoy a net margin of 35%, like Microsoft. On the same earnings multiple, the company would eventually be worth around $140 billion. That’s exuberant, but Snowflake was worth about this much in December. If growth is 20%, it will eventually be worth only a third as much on the same multiples.
Snowflake will continue to thrive. The same might not be true of other highfliers, such as electric-car makers like Lucid, which are burning cash. Without highly valued stock to issue, missteps could prove deadlier.
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