Snowflake Inc. (NYSE: SNOW) plans to raise $2.7 billion dollars in its IPO. It already has orders from Salesforce Ventures and Warren Buffet’s Berkshire Hathaway. This has generated a lot of excitement from investors. The Snowflake IPO shares are planned to be priced between $75 and $85 per share. This is another cloud based SaaS company and the recent dizzying performance of cloud companies has raised a lot of expectations.
Snowflake Inc. growth story and excitement
Snowflake Inc. was founded in 2012 in San Mateo, California by three data warehousing experts. It’s a cloud database and analytics services termed as “data warehouse as a service”. The interesting thing is they never ran the company as CEO, but they hired capable and veteran executives from outside. This is one of the main reasons for the breathtaking speed at which the company grew. Microsoft executive Bob Muglia was appointed as the CEO in October 2014. He ran the company for 5 years.
Current CEO Frank Slootman was just hired out of retirement in April 2019. He has extensive executive experience and was formerly CEO of ServiceNow (NYSE:NOW), one of the leading cloud-based, back-end software vendors for large enterprises. Slootman is highly regarded, and during just six years at ServiceNow, he grew the company’s revenues from $75 million to $1.5 billion. The fact that Snowflake was able to lure him out of retirement also says something about the company’s prospects.
Snowflake would also gain a powerful ally in strategic investor Salesforce, the customer relationship management giant with a market capitalization of about $165 billion. Salesforce participated in the funding rounds. Sequoia Capital is another venture capital firm that led the later fundraising rounds.
Pre IPO valuations are as follows:
- In January 2018, a unicorn valuation of $1.5 billion after raising $263 million.
- In October 2018, Snowflake raised another $450 million, raising its valuation to $3.5 billion.
- In Feb 2020 the company had raised another $479M USD, increasing their valuation to $12.4B USD.
Product and the Market size
Cloud data platform that enables customers to consolidate data to drive meaningful business insights, build data-driven applications, and share data. Customers are charged only for the resources they use. Data is delivered using the cloud model.
“Based on our own estimates, we believe the addressable market opportunity for our Cloud Data Platform is approximately $81 billion as of January 31, 2020.”
Investor relations
According to IDC, the markets for Analytics Data Management and Integration Platforms and Business Intelligence and Analytics Tools will have a combined value of $56 billion by the end of 2020 and $84 billion by the end of 2023.
“Our data sharing opportunity has not been defined or quantified by any research institutions. However, we believe that this opportunity is substantial and largely untapped.”
Investor relations
Capital One, Adobe, and FactSet are among the bigger clients.
Financials
- Product revenue of $95.7 million in 2019 and $252.2 million in 2020.
- A net loss of $178 million for the fiscal year ending January 2019.
- A net loss of $348.5 for the fiscal year ending January 2020.
- 3,117 customers with 56 $1M+ Customers.
IPO quick facts
- Class A stock offered: 28 Million
- Additional Class A: 4.2 Million
- Salesforce Ventures LLC: 3.125 Million
- Berkshire Hathaway Inc.: 3.125 Million + Additional 4 Million shares in secondary transaction
Share count and company valuation
- Total Class A shares: 38.3 Million
- Total Class B shares: 240 Million
- Total shares outstanding: 278,778,162 shares
- IPO Price: $80 (midpoint range)
- Company valuation: $22.2 billion
Risks
- Limited operating history.
- No indication to achieve profitability in the next 3 years.
- Cloud providers (AWS, Azure, and GCP) control the operating costs.
- A lot of growth stories and some more are already built into the IPO price. Any future revenue contractions can lead to significant stock price declines.
- Stock dilution due to conversion of options.
- No clear plan to use the capital raised in IPO.
Conclusion
A lot of the growth story has already been built into the IPO. There is very small room for error now. One wrong execution can bring the Stock price dramatically down.
Warren Buffet does not usually invest in IPOs and especially his deputy Charlie Munger famously said that there are very few bargains in the IPO space.
However half a billion dollars is pocket change for Berkshire Hathaway that is sitting over $100 billion dollars of cash. However for the retail investor, it’s not the case. It’s best to exercise caution and sit on the sidelines for the SnowFlake IPO.