3 Reasons To Buy Into Snowflake’s IPO

On August 24, Snowflake, a fast-growing software startup, issued financial statements in anticipation of an IPO. I’ve written about many companies before their IPOs. However, I’ve been skeptical of most of them.

Two exceptions: Zoom Video — whose April 2019 IPO struck me as compelling — its shares are up 3.8-fold since then — and now Snowflake. Although Snowflake is losing lots of money, it is growing rapidly and I am confident its shares will soar the day it goes public.

Moreover, unless market conditions are awful the day it goes public, I expect its shares to keep rising after that first-day pop. Here’s why:

  • Snowflake’s CEO has a tremendous track record taking companies public.
  • Snowflake’s industry is large and growing fast; and
  • Snowflake’s business strategy is a winner.

What is Snowflake?

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Snowflake supplies a cloud-based data-warehousing service that helps companies analyze data. Although it is losing money — posting a net loss narrowed to $171.3 million (down $6 million from the year before) — Snowflake’s sales grew 121% in the July 2020 ending quarter — far faster than rival Datadog DDOG — whose revenues were up 68% in the latest quarter.

Snowflake is backed by an impressive array of investors — most notably Sequoia — and was valued at $12.4 billion when it last raised capital in February when it filed confidentially for its IPO, according to Reuters.

Snowflake — which has raised a total of $1.4 billion — grew even fast and lost more money on a fiscal year basis. For the year ending January 2020, revenues soared 173.7% to $264.7 million while its net loss nearly doubled to $348.54 million.

An IPO expert is expecting a positive result for investors. Kathleen Smith, principal at Renaissance Capital, told Reuters, “Even though there are losses, Snowflake’s 100%-plus growth rate will attract investor interest. The IPO market is healthy and Snowflake’s peers MongoDB MDB , Okta and Splunk have produced strong returns for investors this year.”

Snowflake’s CEO Has A Successful Track Record

I have interviewed Snowflake’s two most recent CEOs: Bob Muglia — who ran the company from 2014 and current CEO since August 2019, Frank Slootman.

Slootman has a very successful track record of growing private companies and making money for investors. He took Data Domain public in 2007 and sold it to EMC in 2009 for $2.4 billion before leading ServiceNow’s IPO — the stock is up a whopping 18.6-fold since its June 2012 IPO.

A Snowflake IPO will not be the end of its journey. As Slootman told me this February, “An IPO for Snowflake will be an entry event not an exit. I’ve done two in my life. The IPO is an unwritten contract between employees and the company so they can realize their investment.”

Muglia — who grew Snowflake to the point where it raised $450 million in October 2018 at a valuation of $3.5 billion, according to ZDNet — must have mixed feelings about Slootman taking over his job. On the one hand, his 3.3% stake will be worth plenty when the company goes public — on the other hand, Slootman is getting the glory and owns 5.9% of Snowflake stock, according to CNBC.

Muglia is a 20 year Microsoft veteran who was responsible for its $16 billion Windows Server, SQL Server, System Center and Azure. He joined Snowflake as CEO in 2014. He told me in June 2018 that demand for Snowflake had been spiking — its customer count for the year ending January 2018 was up 300%.

He also described how Capital One — which now accounts for 11% of Snowflake’s revenue, according to CNBC — became a customer. According to Muglia, “Capital One was way ahead of the crowd. In 2013, its CEO decided to move its entire IT operation into the cloud. The CEO wanted to change the culture of the company. He thought that technology was so meaningful, that Capital One needed to be more integrated into Silicon Valley.”

Amazon and Microsoft both offered data warehousing — but Capital One picked Snowflake. “They don’t take full advantage of the cloud and Capital One was looking for a shift forward. They concluded that Teradata TDC could not take them into the cloud. And they picked Snowflake because it could run 250 concurrent data analysis queries — compared to 60 for Teradata — at a much lower price (25% to 30% of what Teradata charges),” Muglia told me.

Teradata disputed those claims, and noted it was not in a direct benchmark at Capital One against Snowflake. Teradata also said it had no concurrency limits and that the claim that it couldn’t take Capital One into the cloud was untrue. Teradata added that its pricing is “usually far less expensive when you account for the volume of data and queries being run at scale (which Snowflake can’t match).”

Slootman — who left as ServiceNow’s CEO in March 2017 — credited Muglia with building Snowflake into a company that had “crossed the chasm” with a strong customer base.

Reading between the lines, I am guessing that Snowflake’s board decided it needed a CEO who had taken a company public successfully. As he told me in August 2019, “We are in scaling mode. We are building an investable model that will yield a predictable yield on resources. We are doing organization building, boosting efficiency, increasing productivity, strengthening our executive staff, and making changes to distribution and R&D. And we are preparing our systems, compliance, and processes for going public.”

Snowflake’s Industry Has Growth Potential

Snowflake competes in a large industry that’s growing fast. The data warehouse as a service market is predicted to grow at a 29.2% compound annual rate from $1.4 billion in 2019 to $23.8 billion by 2030, according to P&S Intelligence.

Much of the industry’s growth has not yet been realized. According to Bloomberg Intelligence that’s because “only 30% of data analytics is now performed in the cloud, putting Snowflake in a great position to take share from the legacy on-premise vendors.”

Snowflake Has Powerful Growth Drivers

Snowflake is benefiting from an accelerating corporate shift from on-premise computing to the cloud — which is being accelerated by the rise in working from home propelled by the pandemic.

As Slootman explained this February, “After 30 years of investing in on-premise computing, companies are realizing that the excuses for not going to the cloud are bullshit. They are realizing that they have to go to the cloud in order to attract talent because on-premise computing cannot operate modern software.”

Snowflake — which added 500 new customers in the quarter ending January 2020 — was gaining market share due to its “non-linear scale and performance.” He said, “We can handle thousand-fold increases in database usage from terabytes to petabytes. And we provide customers with unlimited computing power that can reduce compute times from hours or days to seconds or minutes.”

When Snowflake lands new customers, they increase their use of its product very rapidly. “Our clients are increasing their utilization at over 100%. They don’t need contracts and we invoice them on demand which can increase rapidly from $0 to $10 million in revenue,” he said.

Growth in demand is particularly rapid from startups. As he explained, “We work with new digital enterprises that are growing rapidly and no longer need to make large capital outlays for on-premise computing. We are managing abundance. Companies can increase their utilization from terabytes to petabytes without breaking a sweat.”

Slootman said that the competition is trying to follow in the trail Snowflake is plowing. “We blazed a trail with our architecture by separating data and compute in the public cloud. Eventually competitors will get there. “We are winning customers who are switching from on-premise to the cloud and are taking business from Oracle ORCL and other legacy SQL players,” he said.

His long-term vision is for Snowflake to pioneer and lead what he called the “data cloud.” As he said, “AWS and Azure operate the infrastructure cloud, Salesforce CRM is the app cloud, we want to be the data cloud — a platform that governs and secures private data and can manage rapidly growing workloads. Facebook would be a great customer for our data cloud.”

Buy Snowflake When It Goes Public?

I expect that Snowflake stock will soar when it goes public. The risk of buying it then is that when Snowflake reports its first quarter as a public company it falls short of investors’ high expectations and then falls.

Another risk is that lockups — which prevent insiders from selling — usually expire six months after the company goes public. That expiration tends to cause prices to fall since a flood of shares often hit the market.

Having said that, I am optimistic about Snowflake’s long-term prospects due to its large market opportunity, sizzling growth, and strong management team.

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