TechCrunch recently covered Databricks’ financial performance in 2020, contrasting its recent performance to some historical 2019 data that the company shared.
The data-and-analysis-focused unicorn grew its annual run rate 75% to $350 million, compared to its year-ago quarter, meaning that the firm is growing well at scale. TechCrunch described it as “an obvious IPO candidate” at the time, a little under two weeks ago.
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Since that point, Bloomberg reported that Databricks is indeed charging ahead with an IPO, a transaction that could come as soon as the first half of 2021, writing that it “has held talks with banks but has yet to hire underwriters” for its flotation.
That is enough news for us to have fun with. So, this morning let’s collate all that we know about the company’s financial performance, mix in some current market valuation metrics, and do some light projecting of Databricks’ growth. Our question? What might the company be worth at the end of Q1 or Q2 next year.
Of course, there are some worrying signs on the horizon that the stock market is about to shift lower, but, hey, there’s no need to be a pessimist this early on a Monday morning. Let’s get into the math.
Databricks’ potential IPO valuations
Starting with some history, Databricks was worth $6.2 billion after its September, 2019 Series F round of capital. The company raised $400 million in the transaction, its largest round to-date by $150 million. That capital should get the company to an H1 2020 IPO, provided that its spending didn’t go all old-school Dropbox.
As noted above, the company has also given out a few financial metrics that are of use for us. Its $200 million Q3 2019 annual run rate, its $350 million Q3 2020 annual run rate and a gross margin statistic for its “subscription” incomes of better than 80%.
From here we can begin to do some constructive financial surgery.
Databricks crossed $350M run rate in Q3, up from $200M one year ago
Databricks grew its annual run rate by $150 million in four quarters, or by $37.5 million per quarter. Presuming that the company’s growth stays flat in gross dollar terms, and therefore negative in percentage terms, Databricks would wrap Q1 2021 with an annual run rate of $425 million and Q2 2021 with an annual run rate of $462.5 million.
If you want to presume that Databricks will add, say 10% more gross dollars in annual run rate per quarter from Q4 on, those numbers rise to $436.6 million Q1 2021 and $486.5 million for Q2 2021. Databricks gets very close to an annual run rate of $500 million if you presume that its growth in gross dollar terms rises even 10% quarterly.
To calculate what those numbers mean in year-over-year revenue terms is tricky, given that we lack Q1 and Q2 2020 annual run rate numbers. If, however, you scale the company’s run rates back by the same $37.5 million per quarter, you wind up with:
- Databricks at $425 million Q1 20201 annual run rate: ~+54.5% YoY growth.
- Databricks at $436.6 million Q1 20201 annual run rate: ~+58.8% YoY growth.
- Databricks at $462.5 million Q2 20201 annual run rate: ~+48% YoY growth.
- Databricks at $486.5 million Q2 20201 annual run rate: ~+55.7% YoY growth.
You can vary its growth rate up and down to generate your own revenue run rate targets, of course, which is easy enough. Apologies to whomever at Databricks who actually has the above data, in case we are off by an embarrassing amount.
Regardless, we now have some year-over-year growth estimates for Databricks’s Q1 and Q2 2021, which means we can scoot along with our IPO valuation experiment.
We now have a choice to make. We have to come up with our own estimate concerning which portion of Databricks’ revenues are service based? If we say 10% or less, we can effectively ignore the line item. If they are greater than 10%, their impact on the company’s overall gross margins could become material. (Services revenues have low gross margins, while software incomes have high gross margins; high gross margins are better.)
Let’s be generous and say they are 10% or less, and that their overall impact brings Databricks’ blended gross margins down to, say 75%.
That number puts it in fine company for its market class, and worthy of a nice and healthy revenue multiple. But, how large of one?
Okta’s gross margins are in the mid-70s on a GAAP basis and it grew 43% in its most recent quarter. It’s worth 38x sales, per YCharts. That’s a pretty good comp, though of course every company is different.
Slack has higher gross margins and faster growth but is only worth 20x sales, again using all YCharts data.
So between 20x and 38x seems somewhat reasonable for Databricks, provided that there’s nothing nasty lurking in its numbers, like too much services revenue, bad net retention or sharper unprofitability than we’d otherwise expect. Those figures, and our Q2 2021 revenue estimates value the firm somewhere between $9.3 billion and $18.5 billion at the upper and lower bounds.
I’d reckon that a number closer to 20x is more likely, so a $10 billion valuation for Databricks seems pretty doable provided reasonable growth in the coming three quarters. Larger revenue multiples yield outsize results, of course.
Why does 20x feel more likely? Because Okta’s valuation is an anomaly, frankly, coming in at around 2x the median public SaaS company’s revenue multiple. We should not expect similar outperformance for Databricks until it demonstrates why we should award it.
Whatever the case, Databricks’ private investors are going to make a good deal of profit on this particular IPO, if SaaS valuations hold up. More when we hear it.
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