Toward the end of the previous week, journalist Eric Newcomer independently reported that Databricks is securing a new round of funding, establishing a company valuation of “approximately $27 billion.” Shortly after, another news source added to the discussion, indicating they understood the funding round might be valued at $29 billion, representing a slightly increased assessment.

Indeed!

Previously, The Exchange analyzed Databricks’ financial performance as a privately held organization. As a reminder, Databricks delivers analytics and data science solutions to its clientele and achieved a $350 million annualized revenue run rate by the close of the third quarter of 2020.

This represented an increase from $200 million during the same period in the prior year. We observed at the time that Databricks appeared to be “a strong contender for an IPO” and possessed “extensive options within the private market.” Recent reports concerning additional capital raising reinforce our earlier observations.

We went even further in our analysis following indications that Databricks might become a publicly traded company in the first half of 2021, compiling and evaluating all available financial data to estimate a potential valuation range. Our initial calculations were somewhat conservative when compared to recent reports, which is the central focus of our current investigation: Are we able to develop a financial model that reasonably supports a $27 billion valuation for Databricks?

Databricks chose not to provide a statement. However, this will not deter our exploration. Let’s revisit what is known regarding Databricks’ historical growth, financial structure, and operational scale.

This will allow us to compare our projections against the reported valuation range and determine relevant financial multiples. We will then compare these multiples to those of several publicly traded, high-growth companies.

Do the figures align in a logical manner? Is it plausible to envision Databricks being valued at over $25 billion, more than quadrupling its private valuation of $6.2 billion from 2019? Let’s investigate.

What’s it worth?

In a prior analysis, we developed several growth projections to estimate Databricks’ current size. To avoid excessive detail, considering the company’s expansion from a $200 million annual run rate to $350 million between the third quarter of 2019 and the third quarter of 2020, we projected that it would finish the first quarter of 2021 with an annualized revenue between $425 million and $486.5 million.

By examining various data points from the Bessemer Cloud Index and applying somewhat conservative estimates for Databricks’ revenue quality, we identified comparable market valuations that would have resulted in a sales multiple ranging from 20x to 38x. Applying the highest end of our projected revenue run rate for Q1 2021 and the highest multiple, we arrived at a valuation of $18.5 billion.

This figure is significantly lower than the $27 billion valuation. Therefore, there appears to be a discrepancy in our series of estimations. This could be due to:

• Databricks experiencing faster growth than we predicted, resulting in a larger and more appealing company for investors.
• Databricks possessing more favorable revenue characteristics than we initially assumed.
• Databricks demonstrating stronger SaaS metrics than we anticipated.
• Changes in the market since our last assessment, leading to a reevaluation of Databricks.

The first three possibilities are readily apparent but difficult to definitively determine. Our initial assessments were based on limited information. However, we can examine current market comparisons to gain further insights.

We previously used Okta and Slack as benchmarks for generating sales multiple comparisons for Databricks, as we believed they shared characteristics relevant to the private company’s potential public value. Currently, these companies are valued as follows:

• Okta: 38.5x enterprise value/annualized revenue.
• Slack: 25.5x enterprise value/annualized revenue.

Slack’s valuation has increased somewhat due to its acquisition by Salesforce, but Okta’s valuation remains comparable to its previous level. This suggests that the upper limit of our estimates remains below $20 billion. Despite this, the $27 billion valuation persists.

It’s possible that investors share Newcomer’s view that Databricks “has a comparable investment narrative to Snowflake.” Snowflake’s successful initial public offering and exceptionally high revenue multiple are well-known. Yahoo Finance currently lists Snowflake’s multiple as 166.22x, based on trailing revenue rather than an annualized quarterly figure. While the multiple would be somewhat lower using the same revenue calculation method as for Databricks, it would still be considerably higher than that of other publicly traded software companies.

Perhaps Databricks is simply more attractive to investors than our chosen comparisons suggest, or its growth has been particularly strong since the third quarter of 2020. Regardless, the reported pricing indicates a funding round that, if completed as reported, would signify significant developments within the company.

Returning to our initial inquiry: Are we able to develop a set of figures that can justify a $27 billion valuation for Databricks? No.

From our perspective, the $27 billion valuation appears rather high. We are particularly eager to review Databricks’ S-1 filing.