The time has finally come…Snowflake is going public this week, and today, I’m gonna take
a deeper look into the company to see if the hype is warranted. We’ll look at the background
of the company, dig into the financials and I’ll give what I feel are the reasons for,
and the reasons to be cautious, in buying the Snowflake stock. If you’ve been waiting
for the Snowflake IPO, this video is for you! Welcome to the Healthy, Wealthy, and Wise
channel where we talk about all the big, and not-so big companies going public, whether
it’s by a traditional IPO, a SPAC or a direct listing. For those of you new here, my name
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that little red subscribe. And to everyone in the community, welcome back…I know that
the Snowflake IPO has been the IPO that I’ve gotten the most questions and comments on,
so I hope you like and find this video helpful! From comments in previous videos, I know there’s
a lot of thoughts out there on how the stock is expected to price so I’d love to hear
your thoughts on where you think the stock will close on that first day of trading; please
let me know in the comments. As a quick reminder, I’m not a financial
advisor, and while this video is meant to be informative, it should not be seen as a
recommendation for you to take any action on the companies covered—you should always
do your own research or consult with your own financial advisor when making any investment
decision. Okay, let’s get our snow shovels out and
dig into this company! For some background, Snowflake is a cloud-based
data-warehousing company that was founded in 2012 in California, with a vision of creating
a data connected world where organizations have seamless access to explore, share, and
unlock the value of data. At the most basic level, its technology allows companies to
store and manage data in the cloud, which we know has been a huge and important growth
area for Microsoft and Amazon. The company’s founders were three experts in data warehousing,
with two of the coming from tech giant Oracle. And because of the founders’ love of snow
sports, they decided to name the company Snowflake. For 2 years, the company operated in secret
until coming out to the world after appointing former Microsoft executive Bob Muglia as CEO.
In that same year, 2014, is when the company first started selling their platform.
So let’s talk a little bit about their platform and product. The company is pioneering the
Data Cloud, an ecosystem where Snowflake customers, partners, and data providers can break down
data silos and derive value from rapidly growing data sets in secure, governed, and compliant
ways. To meet that objective, their cloud-native architecture consists of three independently
scalable layers across storage, compute, and cloud services.
The storage layer ingests massive amounts and varieties of structured and semi-structured
data to create a unified data record. The compute layer provides dedicated resources
to enable users to simultaneously access common data sets for many use cases without latency.
And then the cloud services layer intelligently optimizes each use case’s performance requirements
with no administration. This architecture is built upon three major
public clouds, and ones you’ve heard of, in Amazon Web Services or AWS, Microsoft Azure,
and the Google Cloud Platform. Additionally, they run across 22 regional deployments around
the world. These deployments are interconnected to create a single Cloud Data Platform, delivering
a consistent, global user experience. The company has grown quickly, which is why
investors have eagerly awaited news of the company filing its IPO papers since February
and then just last month, they finally did when they announced that the company intended
to list on the New York Stock Exchange under the ticker SNOW. And there actually had been
a lot of interest for some time, as this company has raised around 1 and a half billion dollars
in venture financing prior to going public. Currently, Snowflake has over 31 hundred customers
as of July 31st of this year, including seven of the Fortune 10 and 146 of the Fortune 500
companies. To name some of the biggest ones, they have Capital One, Experian, Bankrate,
Sony, Office Depot, DoorDash, Instacart, Adobe, DocuSign, Micron and Dropbox. So you can see
their customer base is across many industries. Let’s go back to February for a second.
It was no surprise that Snowflake made its intentions known then that they were looking
to go public this year. Because just months earlier, the company named Frank Slootman
CEO. Slootman is somewhat of a corporate star due to his reputation for making money on
taking private companies public. As I’ve mentioned before in other videos, he previously
served as Chairman of ServiceNow and before that, he was also successful in taking Data
Domain public in 2007 before selling it for big money just 2 years later.
There’s also one other thing I want you to keep in mind about February, and that is
when they were reported to have had their most recent fundraising round. At that time,
Snowflake was valued at about $12.4 billion. Keep that number in mind, because we’ll
come back to that in a bit. Back to our shovels, as we dig some into the
financials the company released in their S-1 filing. Let’s start with revenue growth.
For the fiscal years ended January 31 for both 2019 and 2020, their revenue grew from
$96.7 million in 2019 to $264.7 million in 2020, representing year-over-year growth of
174%--which is obviously eye-catching! And for the six months ended July 31 for both
2019 and 2020, revenue grew from $104.0 million to $242.0 million, representing year-over-year
growth of 133%. And if you’re wondering if there is even
more potential for growth out there, well there apparently is. According to IDC, the
markets for Analytics Data Management, Integration Platforms, Business Intelligence and Analytics
Tools, which is where Snowflake operates, will have a combined value of $56 billion
by the end of 2020 and $84 billion by the end of 2023. And for an industry, the data
warehouse as a service market is predicted to grow at a 29.2% compound annual rate through
2030…so there should be a lot more growth to come. In fact, according to Bloomberg Intelligence
that’s because they state “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.”
From the filing, Snowflake reported a dollar-based net revenue retention rate of 158% for the
period ended July 31, 2020. You can take this as a positive response to their platform from
their current customers. And gross margins are continuing to improve
as well. Again, for the fiscal years ended January 31, 2019 and 2020, the gross margin
improved from about 46% to 56%. And then for the six months ended July 31st for both 2019
and 2020, the gross margin grew from 49% to almost 62%...again, nothing to complain about
here. Now keep in mind that the company is still
not profitable with a net loss of $178.0 million from the fiscal year ended January 31, 2019
ballooning up to $348.5 million for the fiscal year ended January 31, 2020.
So while revenue is up, it’s still not overcoming an overall total operating loss of 506 million
dollars for fiscal year 2020, resulting in it not being profitable: so obviously, this
is the not so good news part of the financials. The operating loss can be broken down into
294 million dollars spent on sales and marketing, 105 million on research and development, and
another 107 million on general and administrative expenses. Obviously, there is a big push on
marketing and sales based on the numbers that Snowflake is reporting.
Now, when looking at the past two quarters, we do see that they are beginning to burn
less cash and that is something they want us to be aware of as we approach the initial
public offering. Was part of that due to the pandemic slowing everything down? Or maybe
even a little window dressing as they ready to go public? Whatever the case, there is
no question that they are looking at the IPO as an opportunity to obtain more capital,
so that they can continue growing exponentially, while still being unprofitable.
From the filing, Snowflake states they plan to use the net proceeds of the IPO for general
corporate purposes, including working capital, operating expenses, and capital expenditures.
The company also will have the standard 180 day lock up for pre-IPO investors and insiders.
They also do not plan to offer a dividend in the foreseeable future, which is typical
for most growth companies at their stage. In the amended filing that came out last week,
Snowflake stated plans to raise over $2.2 billion by offering 28 million shares at a
price range of $75 to $85. However, before I recorded this video, on Monday, the company
revised its pricing expectations upwards to a range of 100 to 110 dollars which would
bring in over 2.9 billion dollars at the midpoint price of 105 dollars. And at that midpoint
of the proposed range, Snowflake would command a fully diluted market value of $37 billion.
I can’t say I’m surprised that they increased the amount of money they were looking to raise,
but I thought they might’ve have done that by selling more shares instead, versus increasing
the share price into the triple digit range. Either way, at pricing, Snowflake would be
the largest-ever IPO of a software seller, both in terms of proceeds raised and IPO market
cap. Where it became more interesting is when Snowflake
first noted last week, quote “Immediately subsequent to the closing of this offering,
and subject to certain conditions of closing as described in the section titled “Concurrent
Private Placements,” each of Salesforce Ventures LLC and Berkshire Hathaway Inc. will
purchase $250 million of our Class A common stock from us in a private placement at a
price per share equal to the initial public offering price” end quote. And then reading
along, it said that Berkshire Hathaway had agreed to purchase over 4 million more shares
of Snowflake stock in a secondary transaction at a price per share equal to the initial
public offering price. So what this means, is that the company plans to raise an additional
$500 million from Salesforce Ventures and Warren Buffett’s Berkshire Hathaway, and
then, with that secondary transaction, Berkshire will end up having much more than the $250
million invested from the first transaction. That was in intriguing development to the
Snowflake IPO. The IPO is expected to be priced on Tuesday,
September 15th with public trading to begin on Wednesday the 16th. I’m sure it will
be quite the spectacle on all of the business news channels.
So what do I personally think about this IPO? Well, I’m recording this before the IPO
is officially priced, so I don’t have the exact number, but assuming it is in the 100
to 110 dollar range as expected, it’s going to be a pricey company to buy into. Now price
isn’t value, but when you look at where the company was valued at in February, which
as I said earlier, was at 12.4 billion dollars, it’s gonna be more than tripled, and you
have to ask yourself if that new valuation is warranted just 7 months later. I think
this is where all of the hype in the company has helped Snowflake. As investors, we look
at IPOs as successful when a company is priced and then once it starts trading, the price
goes up. And that is good for investors, but for the company, while it is good from a perception
point of view in that it shows people want their stock, they also realize that they actually
left money on the table. I’ll use an example to help clarify what I’m saying. Let’s
say a company is priced at their IPO at $20, where 100 million shares are sold to the institutional
investors and banks, resulting in them having raised 2 billion dollars. And then trading
starts and the stock closes at $40. Again that’s great for the investors. But the
company, who already sold the shares at $20, could have had an additional 2 billion dollars
had the underwriters priced the company at $40, the price that it would've been able
to get on the market. It’s one of the reasons some companies, usually ones that already
have good funding, will decide to do a direct listing versus a traditional IPO. And now
that the rules have changed with direct listings being able to raise money, we might start
to see more of them; time will tell. Ok, so why am I bringing this up? Well, I
feel when it comes to this IPO, Snowflake has some leverage in the pricing due to the
massive amount of hype out there. And then when you announce Berkshire Hathaway’s interested,
and willing to pay at the midpoint of the proposed range, I’m sure in consultation
with their lead underwriters Goldman Sachs, they determined that they could price it to
make money at a level where they won’t feel shortchanged like in the example I just gave...and
yet still generate positive publicity for investors.
Although, there is no doubt that the retail investor crowd was disappointed at the proposed
price range, and I can tell that, just from comments on this channel, that some of the
enthusiasm has been dampered. But since most retail investors aren’t able to get in at
the IPO price anyway, even if was set for set for $40, it could have tripled out of
the gate. It will be interesting what happens at the actual IPO pricing to see what the
actual price ends up being and then where it opens, as well as ends, on that first day
of trading. While I would like to see the company start
to reduce its losses more substantially in the coming year, the fact they are still fairly
young in their development and having major growth in a market that is still growing are
all major pluses for me. Aside from the operational losses, the other
significant caution area to consider is competition. And Snowflake has some with big names: AWS
Redshift, Google Big Query and Microsoft Synapse. The interesting dynamic to me is that, while
Snowflake completes with the big names, it is also a customer to them, because as I mentioned
earlier, their platform runs on the clouds built from those same companies. So from a
business risk perspective, those companies could decide to charge Snowflake higher amounts
in order for them to be able to undercut the company and price their own data cloud services
cheaper. Now there’s no indication that will happen anytime soon, but it is a possibility.
However, knowing that Amazon, Microsoft and Google don’t have a monopoly on the cloud
because of each other being there, they’re probably not going to price them in a way
that would drive Snowflake to one of the other 2 companies. As I’ve said before in another
video, Snowflake needs to hope those big 3 companies continue to act more like partners
than as competitors. At this time, this dynamic of being customers
of their competitors, along with the operating losses wouldn’t stop me from buying the
company. The recent revenue growth performance and prognosis for further growth is very enticing
and supersedes those concerns for me. The one thing that could stop me is the price
that I can get it for. No matter what the IPO is priced at, it’s hard to say what
the stock will go for once it hits the market. With the proposed pricing range and how that
will drive up the valuation from where it was just 6 or 7 months ago, make no mistake,
this IPO is pricey. So there are 2 thoughts on this, one is that
if I, or you, believe in Snowflake long term, and we’re willing to hold it long-term,
then it might make sense to buy it at a premium. However, how much of a premium is the question….a
little premium could still make sense in the long run, a huge premium, maybe not so much.
The other thought is to only pay what you believe it’s worth right now, and that can
be tricky for this company because of not only the hype, but we don’t have the more
stringent reporting of financial data that is required of public companies as of yet.
However, more than likely if you take this approach, you will not buy in because it will
be hard to justify whatever price it will trade at.
Now anyone that’s watched me for awhile knows I won’t tell you what to do or what
I expect the price to be since I don’t have the ability to predict the future. If I was
born with that talent, I would definitely share that information with my community.
The most I strive to do for you is to pull in the information and try to share it with
you in an easy to understand manner and share some of my thoughts on it and I hope you find
value in that. At the end of the day, I always trust you to know what’s best for you to
do with your money based on your personal thoughts and situation.
Now we wait to see where it’s priced and where it trades. Again, let me know in the
comments what price you think it will close at the end of that first day of trading. I’m
sure we’ll be talking more about how Snowflake’s stock performed out of the gate. Anyway, I
hope you enjoyed the video and found it helpful, and if you did, please push that like button
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With that, thank you for watching and, until next time, have a great day!