Expectations Are Everything

By Charlie Bilello

16 Sep 2021


This is a story about expectations.

But first, I want you to read about Company A and Company B…

Company A had revenues of $66.81 billion over the last year and net income of $7.14 billion. It was founded in 1912 and has 114,000 employees.

Company B had revenues of $851 million over the last year and a net loss of $761 million. It was founded in 2012 and has 2,500 employees.

Which company has a higher market cap?

Surely you’re thinking it must be company A, which was started 100 years earlier and has fundamentals that are far superior. And in the world of academia, that would be a correct assumption 100% of the time.

But as it turns out, this is not a hypothetical.

In the real world Company B (Snowflake, $SNOW) actually has a market cap that is $2 billion higher than Company A (Lockheed Martin, $LMT).

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How in the world is that possible?

Investors are valuing Snowflake at over 98x sales versus 1.4x for Lockheed Martin.

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Why would they do such a thing?

Because Snowflake’s growth rate in their most recent quarter (104% YoY) far exceeds that of Lockheed Martin’s (5% YoY) and investors are betting this phenomenal growth will continue for some time.

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Will they be right?

Only time will tell.

As Morgan Housel has said, “every valuation and forecast is a number from today multiplied by a story about tomorrow.”

The story of Snowflake’s future is so good that investors are willing to pay an astronomical multiple today. But nothing is permanent; all stories change over time.

And as the story of Snowflake changes, so too will investor expectations, and in turn prices. Expectations are everything in markets.


Related Posts:

When Valuation Matters

Investing is Easy?

Tesla and True Believers

245x Sales: The Most Highly Valued Large Cap Company in History?

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About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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