The lofty valuations enjoyed by many Technology companies won’t last forever. Whether it be Biden corporate tax increases (we will know more after January 5th), the Fed allowing interest rates to tick higher (likely not in 2021), or some other event, there is more downside risk than upside opportunity for many richly valued Technology companies. Therefore, why not strike while at peak valuation, especially if desirable targets trade at a discount to your multiple?
Tickers mentioned: AMZN, AYX, CLDR, DDOG, DOMO, GOOG, MSFT, SNOW, SPLK
Snowflake (tkr: SNOW): Snowflake ought to consider acquiring SAS (private). Snowflake’s cloud-only Data Analytics portfolio and customer base could benefit from further diversification.
Sure, momentum investors would not like the deal as SAS would drag on SNOW’s revenue growth rate. However, SNOW’s valuation multiple will eventually head lower as a result of any number of variables including:
- Slowing organic revenue growth (primarily due to the law of large numbers);
- Increased competition from AWS, Azure and GCP;
- Fees paid to AWS, Azure and GCP potentially increasing over time.
Let’s assume SAS generates approximately $1 billion of Operating Cash Flow on $3.5 billion of Revenue. Would $40 billion (40x operating cash flow) be sufficient to entice SAS co-founder and CEO Jim Goodnight to sell? Goodnight is on record saying he would never take SAS public. SAS has a unique culture and Goodnight would have to be comfortable with the corporate culture of potential acquirers in order to consider any deal.
There are other options for Snowflake across the Data & Analytics landscape including Alteryx (tkr: AYX), DataRobot (private), Cloudera (tkr: CLDR), Databricks (private) and Domo (tkr: DOMO) to name a few. Snowflake could also move to acquire companies that play in adjacent spaces such as Splunk (tkr: SPLK) and Datadog (tkr: DDOG).
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