Snowflake is the largest company ranked by market value that isn’t in theS&P 500, but the software provider likely isn’t a candidate for admission to the index because it isn’t profitable based on traditional accounting rules.
Snowflake, which has a market cap of $87 billion, isn’t alone. There are about a dozen large companies, nearly all from the tech sector, that probably don’t make the cut for the same reason, according to a report Wednesday from Stephens analyst Melissa Roberts.
They include Marvell Technology, Cloudfare, Roblox, Rocket Cos., Atlassian, Zscaler, DraftKings and MongoDB.
There has been plenty of speculation recently about candidates to join S&P 500 with the index’s quarterly rebalancing occurring later in December. An announcement of any new additions to the benchmark index likely will come late Friday afternoon.
S&P Dow Jones Indices, which oversees the S&P 500, has made additions to the index at every quarterly rebalance except one over the past three years.
Barron’s wrote earlier this week that Vertiv Holdings, Ares Management, Alnylam Pharmaceuticals and CRH are among the leading candidates to enter the S&P 500 based on their size and profitability.
Snowflake is notable because it has been public for five years and has a high market value, but still isn’t profitable based on generally accepted accounting principles. The company, whose stock trades around $267, lost 89 cents a share in its July quarter and about $2 a share in the first half of its current fiscal year. Snowflake is due to report results for its third fiscal quarter later Wednesday.
S&P Dow Jones Indices requires that companies that enter the S&P 1500, which encompasses the S&P 500, S&P Midcap 400 and S&P SmallCap 600, be profitable in the most recent quarter based on generally accepted accounting principles and also be profitable on a GAAP basis based on the sum of their profits over the most recent four quarters. Companies also need to have a market value of at least $22.7 billion to enter the S&P 500.
Snowflake and most of the other software companies that likely don’t make the cut for the S&P 500 emphasize a non-GAAP profit measure that excludes sizable stock-based compensation, which is often paid in restricted shares.
Analysts and investors are willing to value Snowflake and other tech companies based on what Barron’s and many observers view as a dubious measure since stock-compensation is a real expense. The argument in favor of using the non-GAAP profits is that stock comp is noncash expense. For companies like Snowflake, stock comp is a significant chunk of its revenues—about 35% of sales at Snowflake in the July quarter.
The vast majority of public companies only emphasize GAAP accounting and treat stock comp as the expense that it is. Berkshire Hathaway CEO Warren Buffett is a leading critic of non-GAAP earnings that exclude stock comp.
Buffett wrote in his 2016 shareholder letter: “To say “stock-based compensation” isn’t an expense is even more cavalier. CEOs who go down that road are, in effect, saying to shareholders, “If you pay me a bundle in options or restricted stock, don’t worry about its effect on earnings. I’ll ‘adjust’ it away.”
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