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Will this Snowflake melt?

On September 16th, Snowflake, a cloud computing company, floated on the New York Stock Exchange in what became the largest-ever initial public offering for a US software company. The stock jumped 160% above the initial share price of $120-a-share to touch $315; sending the company’s market value to almost $90bn. The share price then eased to $253.93 at the closing bell in New York last Wednesday. With some big names such as Berkshire Hathaway making a big commitment to the stock, there are certainly high hopes for its future among investors. 

Snowflake Inc.

Founded: 2012

Sector: Technology (software)

CEO: Mr. Frank Slootman

Type: Public

Revenue (Year ending July 31, 2020): $242m

Every snowflake is unique

Snowflake is a cloud computing software company, which allows users to analyse data across multiple remote storage providers such as Amazon Web Services. Since being founded in 2012, the company has quickly grown to become one of the most valuable US start-ups focused on information technology, with backing from investors such as Redpoint Ventures and Sequoia Capital. The company is doing well, with its revenue growing 121% in the second quarter this year from the same period last year and also boasting high “net retention” numbers (158%), showing customers are expanding their use of Snowflake’s tools once they sign up. 

However, like many tech start-ups, Snowflake has burnt through a lot of cash to acquire the market share it now has; recording net losses of $348.5m on their revenues of $264.7m in the most recent fiscal year. But unlike loss-making gig economy companies such as Uber, which listed last year with slowing growth and rising losses, Snowflake’s finances are instead moving in the right direction — a positive sign for investors when looking for start-ups to put their money into. Losses are gradually ticking down — in the previous quarter revenue was $133m, up 121% from the previous year. Snowflake is showing stronger performance than fellow cloud-software start-up Datadog, which reported a 68% growth figure. The appeal of the company, however, doesn’t just come from its triple-digit sales growth, Snowflake is perfectly placed to benefit from the global shift away from on-premises data to the cloud.

The IPO

Goldman Sachs was hired to advise on the IPO, receiving interest from investors looking to buy shares early on back in June. It was originally thought the company could be  valued between $15bn and $20bn. After their $480m round of funding in February, Snowflake was valued at $12.4bn — already tripling its previous valuation. It was indicated the share price would be in a range that valued the company at up to $23.7bn, a lofty valuation target, despite the IPO occurring in the face of a sharp sell-off in tech stocks. This points to the high expectations for the company. In the end, they raised a larger-than-planned $3.4bn by selling 28 million shares for $120 per share, exceeding the original target range of $100 to $110, which itself was increased by more than a quarter early last week. 

The Buffett seal of approval

The IPO gained a boost after Warren Buffett’s Berkshire Hathaway and Salesforce each agreed to purchase $250m in stock alongside the flotation. Berkshire Hathaway also purchased an additional $350m from Bob Muglia, the company’s former chief executive. It is a rare venture into the enterprise technology market by Buffett after a failed bet on IBM in 2011. Buffett was long famous for avoiding investing in tech, a sector he saw as vulnerable to sudden and disruptive shifts in value. Buffett putting his faith in Snowflake has created further confidence among investors as to how the company will perform in the future. 

Are all snowflakes actually the same?

Adam Ronthal, a research vice-president at Gartner, gave warning to the difficulties Snowflake could face in defending its market position against larger data warehousing competitors such as Amazon and Google. Amazon’s Redshift product is a well-funded opponent with the potential to threaten Snowflake’s market share. However, Snowflake boasts strong relationships with all three big US cloud vendors: Amazon’s AWS, Microsoft’s Azure, and Google’s Cloud Platform. Therefore, data can be moved across platforms easily — an invaluable service for companies with multiple cloud contracts, giving Snowflake an edge over any potential competitors. 

The end of a cold winter

After a dry spell of IPOs due to the pandemic, the markets are finally starting to pick up again; investors do not want to be missing out on hot tech stocks, with this fear driving valuations and prices. The surge in recent activity has pushed the capital raised by companies in 2020 to the highest level since 2014. Snowflake’s listing is further evidence of the accelerating demand for tech companies that are benefitting from the shift to remote working. The BVP Nasdaq Emerging Cloud Index, which tracks cloud software companies, has gained 60% this year, more than doubling the returns of the broader Nasdaq index. As long as there is no sudden rise of strong competitors, the prospects for Snowflake look very promising. Warren Buffet may avoid déjàvu and a second failed venture into the volatile world of technology after all. 

Sources:

https://www.ft.com/content/eb8e37c9-b4a5-4b4c-a3cf-2eeac98a8f2b

https://www.ft.com/content/94dbc9cd-fb1f-476d-9235-d44fca1a6d32

https://www.ft.com/content/4a0b57ea-e5e7-4bd9-9077-91808ef5005e

https://www.ft.com/content/aadfa915-3d1b-4777-8d0a-07bb7e8dc8fe

https://www.ft.com/content/e9ecee89-491e-4495-9b18-61d9e86dab1b

https://www.ft.com/content/6438e433-ee5a-49ba-a27a-bdbd3e6cf92a

https://finance.yahoo.com/quote/SNOW/profile?p=SNOW

https://techcrunch.com/2020/08/24/a-quick-peek-at-snowflakes-ipo-filing/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAJUaLaNJbj3Qr2mEr-CeZbrjR9P0OHDdiqc2sotmo1dLUcdU_sIXDKMY0EU_Q0DTgGnQb2NEGEGZ2fClvSEMjii5jA0AzlGx5RU7vOkcII8Ia8DdYum7g6hh-Vxj7JrkaULl-CzpHLRuCmpQglOzzBzTzyGlq0jFwSqNy_0MUooT

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