Snowflake’s no snowflake

2 minute read

A banner for Snowflake Inc. is displayed celebrating the company's IPO at the New York Stock Exchange (NYSE) in New York, U.S., September 16, 2020. REUTERS/Brendan McDermid

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NEW YORK, March 3 (Reuters Breakingviews) - Snowflake’s (SNOW.N) 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 read more 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 (MSFT.O). 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 (LCID.O), which are burning cash. Without highly valued stock to issue, missteps could prove deadlier. (By Robert Cyran)

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own)

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Editing by Swaha Pattanaik and Pranav Kiran

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