Growth Retention Rate

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The Bessemer State of the Cloud Report includes a very interesting new metric, the growth endurance rate.
https://www.bvp.com/atlas/state-of-the-cloud-2021

Growth Endurance equals current year growth rate divided by last year’s growth rate.

Essentially growth endurance is a measurement of how well a company sustains its growth year to year. Bessemer talks about how the market has underestimated growth endurance for cloud software - something we have been well aware of.

They have an interesting scatterplot showing the range of growth endurance across cloud companies. The median growth endurance is around 80%. So if a cloud company is growing 50% this year, one could make an odds-on bet, knowing nothing else about the company, that it will grow 40% next year.

That said, some companies will experience accelerating growth, with growth endurance over 100%, and some companies will have less growth endurance.

I think this is a nice way to get one’s mind around exponential growth and decide if a company is trading at an insane valuation or not.

Take Snowflake, for example, the poster child for “extreme” valuation.

Their TTM revenue is 489.3M and grew 117.4% last quarter.

If Snowflake experiences the median growth endurance of 80%, their next five years revenue will look like this.

ttm +1: growth 93.92%, rev: 948.9m
ttm +2: growth 75.14%, rev 1661.8m
ttm +3: growth 60.11%, rev 2660.7m
ttm +4: growth 48.09%, rev 3940.1m
ttm +5: growth 38.47%, rev 5455.8m (March 2026)

With a present day market cap of 67.32 billion, we can infer that snowflake, if it looks to be a typical cloud business, is trading at 12.34x Mar 2026 earnings.

While this is just napkin math, it gives us a basis for deciding if we are bullish or bearish. We can ask ourselves to what degree Snowflake will have to outperform in terms of growth endurance for its valuation to rate as a buy, and how likely that outperformance is to occur. This is where we get out our crystal balls and think about competitive advantage and industry profile and all that. Profitability also needs to be factored in because we’ve seen companies like Teladoc experience a significant degree of dilution. On the other hand, Paycom is buying back shares.

What I like about growth endurance is that it is a starting point. I’d love to find companies where I can say, “This is a company that should have great growth endurance, and even if this company experiences drastically less growth endurance than the median cloud company, it is still undervalued.”

In the Snowflake example, I do like what I see. I do believe the company will have a better growth endurance than the median, and I’m happy to own some shares based on the numbers here. We won’t really have a sense of Snowflake’s growth endurance until it reports a few more quarters, but we can likely infer growth endurance of other companies through past results. Okta for example seems to have quite a high level of growth endurance.

Anyways, I just thought this was an interesting metric from the Bessemer report that I wanted to bring to the board’s attention.

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“With a present day market cap of 67.32 billion, we can infer that snowflake, if it looks to be a typical cloud business, is trading at 12.34x Mar 2026 earnings.”

This should read March 12.34x 2026 revenue. Also, the title of the post should be say “endurance” and not “retention”.

I swear I try to proofread before I post!

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BobbyBe,

Thanks for bringing this to the board’s attention. I was drafting a post highlighting several insights from Bessemer’s report, as it is very much relevant to the companies followed here. I’ll start off with growth endurance since its the focus of your post, and add a few additional points below that I think would be of interest to this board.

(1) Growth endurance has been one of the primary catalysts of some of the most successful cloud companies. Clearly, maintaining growth rates becomes more difficult as companies scale due to the law of large numbers, but avoiding large decelerations also shows a company’s ability to continuously execute so, so this may be a metric worthy for our toolbox. Here is the growth endurance for some of the companies followed on this board. Clearly, this is indicative of the highest beneficiaries from the pandemic; and includes inorganic growth (that’s why none of these metrics should be viewed in isolation).


Company		Growth Endurance
Zoom			473%
Etsy			368%
Fiver			209%
Shopify			199%
Peloton			166%
Pintrest		165%
Zscaler			152%
Docusign		151%
TradeDesk		139%
Roku			118%
Unity			110%
Twilio			105%
Cloudfare		98%
Crowdstrike		97%
Fastly			90%
Okta			90%
MongoDB			86%
Snowflake		84%
Smartsheet		73%
Asana			73%
Datadog			67%
Elastic			65%

(2) The market cap of public cloud reached $2.2T in February 2021. This is after reaching $1T exactly a year before, compared to a 45% CAGR from Feb’19 ($690B) to Feb’20. For context, this is roughly equal to the estimated 2020 GDP of Australia, Sweden, and Singapore…combined.

(3) Analysts constantly underestimate the growth persistence (and the size of cloud markets) as highlighted by Jamin Ball https://twitter.com/jaminball/status/1369757359728250881. Finding the companies with the largest dichotomy between analyst predictions and reality is thus one of the levers for outperformance, as the market doesn’t “price in” the dichotomy.

(4) While there’s been a lot of talk about the rise in cloud multiples lately, there has also been a rise in cloud growth rates (2017 average growth rate for private market cloud companies was 65%, compared to 100% in 2020). There was $186B in capital invested in private cloud companies in 2020 (~2x from 2017).

(5) Usage-based pricing companies have an average of 10% higher net dollar retention, and as a result receive a premium in valuation, as the companies grow at the pace of their customers’ growth. It won’t be surprising to see more enterprise SaaS companies experiment with this model, and newer companies IPOing with usage-pricing as their primary model. Eric Vishria referenced this “third generation of SaaS” on a podcast last year. https://www.joincolossus.com/episodes/5085489/vishria-the-pa…

-RMTZP
Protect the identity of this board and maximize your learning by reading https://discussion.fool.com/for-board-newcomers-all-others-34765… before participating

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This is an interesting metric. I think it currently suffers from the same distortion as YoY growth. It feels more backwards-looking because of the distortion. Just look at Zoom. The number is so high but probably is a false view if you expect that to continue.

It is a long term metric by nature since it attempts to map a trend right? I almost get it. I would expect NET to be around 100%, as steady as they seem to be. Anyway, is this just another way of talking about the slope of the “s”-curve?

Thinking about Snowflake I’m not sure the slope will continue like this models. I expect Snowflake is just coming out of hyper-acceleration and will reach an equilibrium at a sustainable, but still high-growth, level.

AM I getting this?

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Hi Bobby Be,
That’s an interesting way to look at it. I does point out how the analysts always underestimate growth. It’s because “you never get fired for being too conservative,” so they go along with guidance which is always underestimated too. However, a problem is that if you use a number just a little different than 80% growth you get a much different answer. For example:

You wrote

Snowflake’s TTM revenue is 489.3M and grew 117.4% last quarter. If Snowflake experiences the median growth endurance of 80%, their next five years revenue will look like this.

ttm +1: growth 93.92%, rev: 948.9m
ttm +2: growth 75.14%, rev 1661.8m
ttm +3: growth 60.11%, rev 2660.7m
ttm +4: growth 48.09%, rev 3940.1m
ttm +5: growth 38.47%, rev 5455.8m (March 2026)

I’m not sure where you got your information on revenue, but their ttm revenue was their fiscal year revenue by definition, which was $592 million, not $489 million. Also, you are looking at annual ttm revenue growth rate each year, so you have to do the same for the starting year, so I took the annual rate of growth, which was 123.6% (with gradually decreasing rate of growth, the last quarter will always be less than the full year).

Now let’s see what happens just changing to an 85% growth endurance instead of 80%.

ttm +0 growth 123.6%, rev :592.0

ttm +1: growth 105.1%, rev: 1213.6m
ttm +2: growth 89.3%, rev: 2297.8m
ttm +3: growth 75.9%, rev 4041.8m
ttm +4: growth 64.5%, rev 6648.8m
ttm +5: growth 54.8%, rev 10292.3m (March 2026)

At the end of 5 years they would still be growing at 55%, and would have $10.3 billion in revenue, and thus would be at a 6 point something EV/S at a rate of growth of 55%.

So changing from 80% to 85% assumptions (plus a more comparable starting point) really changes things.

Hi rmtzp,

Thanks for showing how one years results can be so misleading. You have Zoom at revenue endurance of 473%, but that’s looking at just last year (covid, work from home) compared to the year before (pre-covid). How about the current year? If they grow at 60% this year, it looks like they will have a growth endurance percent of roughly 12% instead of 473%, and compared to the average 80%. I guess that this says that if a company has a growth rate way off their historical results due to extraordinary circumstances, all bets are off and you can’t use those figures.

Thanks to both of you and best wishes,

Saul

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Company Growth Endurance
Zoom 473%
Etsy 368%
Fiver 209%
Shopify 199%
Peloton 166%
Pintrest 165%
Zscaler 152%
Docusign 151%
TradeDesk 139%
Roku 118%
Unity 110%
Twilio 105%
Cloudfare 98%
Crowdstrike 97%
Fastly 90%
Okta 90%
MongoDB 86%
Snowflake 84%
Smartsheet 73%
Asana 73%
Datadog 67%
Elastic 65%

rmtzp

IMHO this definition of endurance tells us much about the past but not so much about the future.

Although there is utility in that, it does not necessarily define future performance which I suggest is of paramount interest.

Consider. ZM shows 473% for reasons known but there are significant questions about its levels of continuing endurance.

On the other hand CRWD and SNOW have lower numbers but for reasons discussed extensively here I suspect both companies will show good numbers going forward probably for quite a while.

For projecting near term growth I think there are other metrics possibly more indicative. I’m experimenting with a product of current quarter retention (DBNER),growth in number of customers, and expansion of margins which would be a basis for real time rates of revenue growth.

Based on other parameters such as guidance for the next quarter, expansion of product offerings etc one might guess at next quarters growth rate.

Still a work in progress.

draj

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It is a long term metric by nature since it attempts to map a trend right? I almost get it. I would expect NET to be around 100%, as steady as they seem to be. Anyway, is this just another way of talking about the slope of the “s”-curve?

Rafe,

I posted some similar observations a moment ago. IMHO in order to map the S curve or some trend (desirable objectives in my view) it might be useful to compile all the info for all companies in a defined space into one curve expressing endurance as a function of revenue. Then one can look at historical info for a given company and see whether it is or isn’t outperforming wrt this metric. If a company is on a growth path in which it consistently shows above normal endurance numbers, then you might have something really useful.I think.

cheers

draj

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As recommended in Saul’s knowledge base, I plot a line plot of the revenue each quarter. This does give a graphical view of the growth endurance. As most would know the slope is the growth rate and the curvature the acceleration rate. Very quickly you can see the trend

Brad

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