Databricks Valuation: Does $38B Make Sense?

Databricks' Rapid Financial Growth and Potential Valuation

Databricks, a leading provider of open-source data lake and data management solutions, has experienced significant financial gains recently. Bloomberg has reported that the company is potentially securing a new funding round of at least $1.5 billion, resulting in an extraordinary valuation of $38 billion.

Recent Funding Rounds and Valuation Increases

This proposed valuation represents a substantial increase of $10 billion compared to its previous funding round in February, where it raised $1 billion at a $28 billion valuation. Databricks has not yet publicly responded to the Bloomberg report regarding this potential new valuation.

Revenue Growth and Investor Confidence

The company’s impressive growth trajectory supports the investment strategy that a startup’s earning potential is directly correlated with its future success. In 2020, Databricks concluded the year with $425 million in annual recurring revenue.

This figure demonstrated a remarkable 75% increase from the preceding year. Such revenue growth directly influences valuation, and Databricks exemplifies this principle effectively.

Historical Valuation Progression

In October 2019, Databricks secured $400 million in funding at a valuation of $6.2 billion. By February 2021, this valuation had more than quadrupled to $28 billion. If current reports are accurate, it could now reach $38 billion.

The Consumption-Based Revenue Model

A key factor contributing to Databricks’ success is its consumption-based pricing model. Revenue is generated based on the volume of data processed through its products. Given the exponential growth of data, the company is experiencing considerable financial benefits.

Comparison to Snowflake and Market Context

It is important to note that Snowflake, Databricks’ main competitor, went public last year and currently boasts a market capitalization of nearly $83 billion. Considering this, the $38 billion valuation appears less exceptional.

However, it raises the question of the revenue levels required to justify such a high valuation. Further analysis is needed to determine the revenue-to-valuation ratio and its implications.

Analyzing Databricks’ Valuation

Let's revisit the company's valuation history alongside its revenue performance at various points in time to gain a clearer understanding.

• Q3 2019: A $200 million annualized revenue run rate coincided with a $6.2 billion valuation.
• Q3 2020: Revenue increased to a $350 million run rate, however, no valuation adjustments were publicly reported.
• End of 2020: The annualized revenue reached $425 million, resulting in a $28 billion valuation (based on Q1 figures).
• Q3 2021: The revenue run rate remains uncertain, but a potential valuation of $38 billion was suggested.

Databricks’ 2019 venture funding round established a 31x revenue multiple. By Q1 2021, this multiple had expanded to approximately 66x when comparing its year-end 2020 revenue to its valuation. While software multiples generally increased from late 2019 to early 2021, the $28 billion valuation still represented a significant achievement, indicating strong investor confidence in the company’s potential for substantial growth and a future public offering.

Given its track record of revenue growth, it wouldn't be unexpected if the company sought additional funding. Currently, there is a greater availability of capital for expanding software businesses than in previous periods.

However, how should we interpret the $38 billion figure? Maintaining its early 2021 revenue multiple would necessitate a run rate of roughly $575 million. This would represent approximately 36% growth over the preceding two and a half quarters, equating to less than $75 million in additional annualized revenue per quarter since the end of 2020.

Is this level of growth feasible? Yes, it is. The company experienced a $75 million increase in run rate between Q3 2020 and the end of that year. Therefore, a conservative estimate of the company’s growth can support a $38 billion valuation, assuming a consistent multiple. (It’s important to note that our calculations are based on approximate timelines provided by the company; more precise analysis will be possible upon the release of the Databricks S-1 filing.)

This analysis prompts the question of whether Databricks can justify such a high multiple. Comparable precedent exists; for instance, the publicly traded software company Monday.com currently has a revenue multiple exceeding 50x, a valuation earned following a strong first quarter as a public entity.

While a higher multiple for Databricks while still a private company isn't unreasonable, it raises questions about whether the data-centric firm is achieving a comparable growth trajectory. Monday.com reported a 94% year-over-year growth rate in its latest quarter.

In conclusion, the mathematics can align to support a $38 billion valuation for Databricks, but this price point incorporates substantial expectations for future growth. According to Bessemer, top-performing public software companies currently trade at around 23x forward revenue and 27x present-day revenue. Successfully defending this potential new valuation upon going public will require significant effort from Databricks.

Databricks’ CEO, Ali Ghodsi, is scheduled to participate in TC Sessions: SaaS on October 27th. We anticipate gaining clarity regarding this funding rumor during that event, and we will certainly address it with him directly.