After raising their IPO price ranges, both JFrog and Snowflake priced above their refreshed intervals last night. At their final IPO prices, the two debuts are aggressively valued, showing continued optimism amongst public investors that cloud shares are an attractive bet, even if their growth is financed through a history of steep losses, as in the case of Snowflake.
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The JFrog IPO pricing is notable because it shows how much public investors are willing to pay for 50% growth and recent profits from a SaaS company. Snowflake’s pricing is noteworthy for showing the value of huge growth and improving economics.
This morning we’ll explore the two companies’ final values, compare those results to their initial IPO price ranges and calculate their current revenue multiples based on last quarter’s annual run rates. This is going to be fun.
Later today we’ll have updates on how they open to trade. For now, let’s get into the math and valuation nuance you and I both need to understand just where the public market is today as so many unicorns are either en route toward an IPO, or are standing just outside the pool with a single hoof dipped to check the temperature.
Price this, you filthy animal
JFrog priced its IPO at $44 per share, above its raised range of $39 to $41 per share and comically higher than its first price interval of $33 to $37 per share. Indeed, the company’s final IPO price was 33.3% higher than the low end of its first proposed pricing range.
Though I doubt anyone expected the company to go for so little as $33 per share, JFrog’s pricing run shows strong demand even before it began to float.
At $44 per share, JFrog is worth $3.9 billion, not counting shares reserved for its underwriters. If those are purchased, JFrog’s value rises to $3.98 billion, or as close to $4 billion as you can get without earning the figure. As we noted yesterday, for a company last valued at $1 billion in 2018, this is a great pricing run.
You could almost argue that JFrog’s venture capital investors undervalued the firm two years ago, given how it is being priced today. Or perhaps more fairly, that no one could have foreseen 2020’s epic demand for cloud shares, to which JFrog layered on top a quarter’s worth of positive net income. That mix proved irresistible.
Our presumption is that JFrog will pop when it begins to trade, but we’ll be keeping an eye out to see how much of that froth becomes stable market cap. Regardless, here’s the math on how we think of the firm’s valuation:
- JFrog market cap at IPO price: $3.98 billion.
- Last quarter revenue: $36.4 million.
- Run rate set during June 30, 2020 quarter: $145.7 million.
- Implied revenue multiple calculated using its June 30, 2020 annualized run rate: 27.3x.
That’s pretty damn steep! Now, it would be lower if we used a forward revenue calculation, but even if we do a rough calculation and boost the run rate by, say, 50%, JFrog is still worth more than 18x its top line.
Our read: JFrog’s debut is hot as hell because investors in the IPO expect other public market investors to buy the hell out of the profitable company. That’s rather bullish.
Turning to Snowflake, what can we say. At its final IPO price of $120 per share, the data company is worth a bajillion dollars. More precisely, at 277,290,066 shares outstanding after a few transactions tied to the IPO, Snowflake is worth $33.27 billion, a number so large for an IPO that it almost reads like a typo.
And for the debut of an unprofitable company you could argue that it’s a bit rich. But, investors are betting like hell that Snowflake is going to keep growing at an insane clip. How much are they wagering on that result? I’ll let Snowflake’s revenue multiple do the talking:
- Snowflake market cap at IPO price: $33.27 billion.
- Last quarter revenue: $133.15 million.
- Run rate, set during July 31, 2020 quarter: $532.6 million.
- Implied revenue multiple calculated using its July 31, 2020 annualized run rate: 62.5x.
What the f**k is going on? I can help some. Because Snowflake is growing so quickly, investors are betting that its revenue multiple comes down very quickly. If Snowflake can grow 100% between now and this time next year — which I would hazard is a low-end estimate for the company’s revenue expansion — the multiple would fall to around 30x. Still high, but no longer terrifyingly so.
But if Snowflake can grow 150% in the next year, its revenue multiple comes down to ~25x, which is in the realm of sanity for 2020, and, investors hope, 2021. But no matter what, Snowflake is priced so richly that it will be hard to argue that it undershot its real value, even if it does pop higher.
Our read: Either Snowflake is going to keep growing like the wind or this IPO is severely mispriced. Current revenue multiples need to hold up as well. To have that much confidence in this IPO as to bid its shares up so much, investors must be pretty sure of themselves. That’s a bullish thing for every other unicorn.
More when each company prices. What a pair of debuts!