• Ankit Mittal

Snowflake's IPO


Credit: Business Insider


The Deal:

Snowflake, a cloud-based storage and analytics service provider, has filed its initial IPO papers on Monday 24th August for a listing on the New York Stock Exchange by October 2020. Goldman Sachs and Morgan Stanley are leading the offering with the aim of assisting Snowflake achieve its ambitious goal of raising $100 million. The intricacies of the deal are yet to be revealed; investors are still in the dark about the number of shares and the target price per share, but despite this, sentiment seems strong given promising financial figures and the company’s outstanding history - Investors expect the shares to list at a whopping $15-20 billion market capitalisation.


The Company:

Snowflake produces software which allows users to “work with any data, without limits on scale, performance or flexibility.” Despite the enormous size of the company, it has made consistent losses since its establishment in 2012; in its fiscal year ending January 31, 2019, Snowflake lost $178.0 million on a net basis, which grew substantially to $348.5 million in only one year. However, the idea behind the business has attracted great investment; starting with an initial in $900,000 in seed money in 2012, $5 million in Series A investments followed quickly the next year. More recently, it raised $479 million in Series G investments in February 2020 – this valued the company at around $12.5 billion, a figure offering support to the expected valuation of $15-20 billion.

Why Invest?

Growth. Snowflake has attained a 150% gain in its revenues this past year increasing from $96.7 million in its fiscal year ending January 31, 2019 to $264.7 million this year. More recently, over the last 6 months revenue growth has been impressive at 132.7% on a year-on-year basis; this expansion is an indicator to investors that the business truly has more fuel to inflate their investment. Moreover, its gross margins have been improving over time. Increasing from 49.4% for the six months ending July 2019, to 61.6% in the previous 2 quarters, there is growing optimism about not only its market share, but also its efficiency. Looking at profitability, the company is seen a recent turnaround in the rate at which it burns cash. There has been a marginal reduction in the net loss it has faced in the last 2 quarters compared to last year. The combination of increasing revenue growth, rising net margins, as well as falling losses, point investors to a very positive outlook about the company future prospects. CEO Frank Slootman addressed the growing investor interest by clarifying that the IPO was not driven by investor pressure, but rather seen as the next logical step given the previous fundraising success and current market conditions. This helped maintain sentiment given rumours suggesting the motive behind the IPO was Snowflake employees looking to utilise the IPO as an exit strategy to cash in on their current shares.


Market Conditions:

The current market conditions seem highly lucrative for Snowflake’s IPO; with a huge surge in demand for the broader remote software sector, which has heavily outperformed the already rallying tech industry. The BVP Nasdaq Emerging Cloud Index has seen a gain of 65.4%, almost 23 percentage points north of the Nasdaq in the last 12 months. It comes as no surprise that IPO confidence in this space is high: the technology market provides a promising opportunity to capitalise on strong investor demand as depicted by the three other software start-ups, Unity Software Inc., Sumo Logic and Jfrog Ltd., filing for public offerings on the same day. With the industry trading at all-time highs amidst a period of high uncertainty, mega-cap tech giants reaching unprecedented milestones, and a stimulus hungry market receiving the liquidity it needs, it appears the momentum of the tech boom still has fuel.

Snowflake’s main competitors are Google Cloud Platform, Amazon Web Solutions (AWS), and Microsoft Azure, assuring a competitive market for the start-up to grow, where there is not one company controlling a market monopoly. In such a highly saturated market, Snowflake derives its competitive advantage based on its “architectural underpinnings”. Its ability to store vast amounts of data in the cloud without fear of locking yourself in to any particular cloud vendor attracts interest from investors concerned about the repercussions of vendor lock-in, and hence the ‘neutral vendor’ business model provides intrinsic backing to the IPO’s optimistic financial predictions.



Expectations:

Given the increased demand for cloud based solutions under the COVID-19 crisis, the industry is expected to thrive for the years to come. There has been a greater awareness of the capabilities of remote working and online services, a notion that is expected to stick with the world in the post crisis era. Tech giants such as Facebook have hinted at the extended use of work from home policy, and there is nothing to stop other large corporates following in their footsteps. In the best case scenario, the company can be expected to maintain its momentum in the future years, making it an optimal entry point for any growth investors. However, the severe outperformance of this sector raises some concerns. Will Snowflake see the same demand and growth in the post-pandemic world? The answer is not simple, but the historical performance of the company highlights that growth is not circumstantial, but rather there is an intrinsic strengthening of value as shown by the many rounds of successful fundraising. As with any large tech operation, there are always regulatory uncertainties revolving around the success of the business. In the near future concerns about data protection and energy usage will become the forefront of discussions; Snowflake’s ability to adapt to the complexities of its increasing size and changing corporate environment will dictate the long term performance of the company. In the short-run, it seems compliance is often becomes an issue for mega-cap stocks, but for Snowflake there still a long distance to go before it clashes horns with the likes of the big four.