By Varshika Prasanna, Kritika Venkat, Aman Singla (NYU), Aman Sharma, Athean Myat, Chris Lewis (London Business School)
Summary of the IPO
Snowflake’s IPO is much more than just another company going public. It stands as a symbol of the incredibly bullish attitude investors have towards high-growth technology companies. With this IPO raising $3.34 billion, it is the largest ever IPO launched by a software company. Betting on growth trajectory, investors were seemingly unphased at the company’s net losses of $171.3 million for the first fiscal half-year of 2020. Since its founding in 2012, the cloud storage company has raised $1.4 billion from 8 funding rounds involving the likes of Sequoia Capital and Salesforce Ventures. Warren Buffett’s Berkshire Hathaway also made sure to grab a $250 million slice of the IPO.
With any record-breaking event comes skepticism. Critics fear this high valuation echoes the bubble of the dot-com era, where colossal addressable market size and growth trajectories detract from the business fundamentals. Given Snowflake has posted year-on-year topline growth of 132.7% and improving gross profit margins, the question now is how long is the route to profitability, if it exists at all?
Company and IPO Profile:
Sector(s): Technology, Cloud Computing Services
Exchange floated: New York Stock Exchange
Amount raised: $3.36 billion
Offered price and number of shares: $120 and 28 million shares
Over-allotment option: Additional 4.2 million shares sold to underwriters
Equity offered (including over-allotment): 11.64%
Valuation and relevant multiples at IPO:
- Market Capitalization: $33.2 billion
- EV: $33.2 billion (Net Debt of $36 million)
- EV/Revenue: 84.82x
- EV/EBITDA -159.67x
Coordinators/Advisors
- Lead Underwriters: Goldman Sachs, Morgan Stanley, J.P. Morgan, Allen &
Company, Citigroup
- Book-Running Managers: Credit Suisse, Barclays, Deutsche Bank Securities,
Mizuho Securities, Truist Securities
- Co-Managers: BTIG, Canaccord Genuity, Capital One Securities, Cowen, D.A.
Davidson & Co., JMP Securities, Oppenheimer & Co., Piper Sandler, Stifel,
Academy Securities, Loop Capital Markets, Ramirez & Co., Inc., Siebert
Williams Shank
Notable investors (if applicable): Berkshire Hathaway, Salesforce, Sequoia Capital, Altimeter Capital, Sutter Hill, Dragoneer Investment Group
Strategic Rationale
Short Term
Snowflake was experiencing incredible growth up until the IPO with its cloud data warehousing service. In Q2 2020 alone, revenue snowballed by 121%. In comparison, that is almost double the amount of growth competitor Datadog experienced in the same quarter with its modest 68% increase in revenue. However, this recent revenue jump to $264.7 million is overshadowed by the avalanche of losses totalling $348.5 million. Having raised $479 million in February this year, unsurprisingly Snowflake has decided now is the time for a $3.36 billion cash injection to absorb the losses and press on with growth.
Not for the first time were investors unphased by Snowflake’s losses, seduced by its 150% revenue growth rate achieved over 2019 which is probably the tip of the iceberg when we consider how 5G and the global pandemic will accelerate demand for cloud data storage. With investors extremely bullish on technology stocks this year, Snowflake picked an excellent moment to raise capital as they deepen their competitive advantage in the data-as-a-service market. The sector has an eye-watering expected CAGR of 29.3% until 2030, expected to double in size roughly every 2.5 years.
Long Term
It is evident that Snowflake is a high performing growth stock, with its revenue increasing by 175% since the last fiscal year that ended in January and their rapidly expanding customer base. 41% of the customers are also classified as recurring customers thereby providing Snowflake an increased revenue retention rate. The stickiness of Snowflake’s business model sets it apart from even other popular growth stocks such as Peloton and Uber that face the fundamental challenge of remaining relevant to a large enough base of paying users who can so easily switch platforms. The core investment thesis behind Snowflake is that its gaining substantial market share in the exponentially-growing cloud data management market. In Snowflake’s S1 filing, CEO Frank Slootman boasted that the Cloud Data platform is approximately valued at $81 billion at the start of 2020. With Snowflake’s revenue of more than $200 million in the first quarter of 2020, the company has opportuniously placed itself in a position to grow significantly more. The shift to a more digital world makes it inevitable for cloud computing to be very pervasive in daily lives. Their off-the-charts forward price to revenue financial proves that Snowflake is pricing for Snowflake’s long term success.
Market Reaction
Build Up
Snowflake was already finding much success in its funding efforts prior to its IPO. It’s Series G Funding in February helped raise around $479 million, and it’s Series F funding in October 2018 had raised $450 million. Venture Capital firms such as Madrona Venture Group, Sequoia Capital, and Dragoneer Investment Group. Investor excitement increased a week prior to launch with Snowflake’s announcement of Berkshire Hathaway and Salesforce each taking $250 million stakes in the company after launch. Further interest was buoyed from increasing interest in Cloud Computing technologies and companies, which was present prior to the COVID-19 pandemic and has only escalated as remote-work and online interactions have increased. These reasons ended up causing Snowflake to raise its debut price from $85 to $120 less than a week before its launch.
Launch
Snowflake shares surged more than 111% in its market debut on the New York Stock Exchange. The stock began trading at $245 per share and closed at $253.93. Shares of the cloud-data startup Snowflake spiked as much as 165%, to $318.37, on its first day of public-market trading on Wednesday. Trading in the stock was halted shortly after the opening because of volatility. A day earlier, Snowflake priced shares at $120, higher than the $100 to $110 range it estimated on Monday, and a huge bump from the $75 to $85 range it proposed last week.
Snowflake was worth $70.4 billion at the end of trading, more than five times its $12.4 billion valuation in February.The company raised more $3 billion based on its opening price, the most ever for a software company. The stock trades under the symbol SNOW.
Investors had anticipated a blockbuster opening for the company, which is generating over $500 million in annualized revenue and grew over 130% in the first half of 2020. The stock received a vote of confidence, when Snowflake revealed in a filing that Warren Buffett’s Berkshire Hathaway and Salesforce each agreed to buy $250 million of stock at the IPO price in a concurrent private placement. Berkshire Hathaway also agreed to buy 4.04 million shares in a secondary transaction.
But there’s a flip side that’s often talked about: money left on the proverbial table. This looks at the abstract concept of opportunity cost — what Snowflake could have raised if it had priced the deal as the broader market valued it. In this case, that figure is $3.8 billion (in addition to the $4 billion Snowflake raised in the IPO and concurrent private placements). Critics of the IPO process say that’s capital that could have otherwise been invested in the business which is why the concept of SPACs is becoming more and more popular.
Potential Risks and Downsides
Snowflake operates in a fragmented market and therefore competes with companies like Amazon, Google and Microsoft; yet it is dependent on their infrastructure to function. Snowflake sells a database cloud that highly relies on infrastructure from cloud computing platform Amazon Web Services (AWS) and has committed to spending $1.2 billion on technology from AWS. Amazon is making heavy investments in Redshift, a data warehouse product part of AWS and Snowflake’s competitor. Snowflake will be at risk if cloud providers decide to embed certain inter-operating privileges that encourage customers to use their own cloud-based data warehouse over Snowflake. Snowflake has also mentioned that ‘cost of product revenue’ accounted for 94% of its total sales, much of which is going to Amazon. Cost of product revenue primarily consists of third-party cloud infrastructure expenses incurred in connection with our customers’ use of their platform and its deployment and maintenance on public clouds, according to Snowflake’s IPO prospectus. To lessen its reliance on AWS, Snowflake is also using cloud services from Microsoft and Google, but AWS remains Snowflake’s biggest vendor. This should concern investors, as Amazon in its dominant consumer and enterprise businesses to drive out competition.
Snowflake’s gross profit margin is around 61.5% of their revenue, which is not particularly high. While their gross profit margin has increased over time and will continue to increase in the near future, their business model may not be successful in the long term if they have to pay public cloud providers for storage and compute infrastructure. The lossed in Fiscal Year 2020 doubled from $178 million in FY2019 to $348.5 million. In the first six months of FY 2021, the net losses were flat period-over-period at $177.2 million. While this can be regarded as an encouraging sign, it could also be seen as Snowflake tightening the belt temporarily for the public offering before returning to the original pace of worsening losses.
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