Meet Snowflake, the Talk of the Town Cloud Company

By: Rithvik Reddy | rrg5233@psu.edu | September 27, 2020

WFH.

Stands for Work From Home. It’s the three letter acronym that garnered enlightenment during the COVID-19 pandemic. It’s not that it didn’t exist before, it just didn’t click with the working economy. Now that the pandemic has made everything come to a screeching halt, it made us go back to the drawing board and rethink how people should work.

The percentage of U.S. labor force calculated for working from home was 42%. Working from home means relying on technology and tech craft more than ever before. People have become more tech oriented, tech savvy and even tech cautious. This remote working economy led to a big surge in tech companies focused on cloud, cyber security, data and even electronic devices.

Some companies have asked their employees to work from home until 2021, while some extended an option to work remotely forever. This has also led to reduced costs associated with commuting and renting office space.

Take Zoom (ZM) for example. It’s the Google of virtual meetings. Or Palo Alto Networks (PANW), a cyber security firm which focuses on advanced firewalls. Atlassian (TEAM) is another Australian enterprise software company best known for Jira and Confluence, their team collaboration softwares. There are several such companies that have come to the forefront of this remote working economy and WFH investors.

Let’s get back to Snowflake. Yes, it’s a software company based in San Mateo, CA focused on cloud-based data-warehousing company. But no, it’s not just any other software company, it’s the hottest cloud hovering on Silicon Valley and Wall Street. It’s the talk of the town company.

Founded in 2012, Snowflake is focused on helping companies manage and analyze their data stored on the cloud – like AWS and Azure. It has doubled its customer base

to 3,117 compared to 12 months earlier, among which include Capital One Financial and Electronic Arts. The firm is still not profitable yet (losing $348.5 million in last fiscal year) - like many tech startups, but sales in previous fiscal year rising 174% with revenue doubling in most recent quarter compared to year-earlier period and a quickly growing customer base has made investors rethink their tech sector portfolio holdings.

Snowflake’s shares on their IPO debut day were priced at $120 (up from $100-$110 price band targeted by the firm) and more than doubled on their first day rising to $258 in early afternoon trading making it the most highly valued software IPO ever

based on its market capitalization, even more than the IPO parties of 1990s. The company’s regulatory filings lists 23 investment banks including BBs. The company’s valuation stands at more than $70 billion after its first day of trading. Such extreme valuations are fairly common these days in Silicon Valley. Early investors include Sutter Hill Ventures, Redpoint Ventures, Altimeter Capital, Iconiq Capital, Sequoia Capital and Wing Venture Capital. It should be noted that venture capital companies can’t offload their shares until 6 months after an IPO. Salesforce’s venture capital firm has also invested $250 million in Snowflake. It has the bazooka it needs on it back.

What’s interesting is Warren Buffett has joined the game. He’s not known for investing in IPOs and not known at all for making quick gains. Buffett’s Berkshire Hathaway held roughly $730 million worth of share in Snowflake at the start of the trading day. That holding was valued at $1.55 billion at the end of the trading day, a gain of roughly $800 million.

Snowflake’s business looks too good to be true. It is, without a doubt, but has some downsides as well. It’s business model is in direct competition with trillion dollar companies – Amazon, Google and Microsoft, who can attract Snowflake’s customers with lucrative incentives that a startup can’t afford to match. The company also said that its profitability partly depends on the cloud costs that it negotiates with its vendors that sometimes are rival firms. It’s a small fish in a big ocean with great white sharks. The trillion dollar firms can pose unfavorable pricing environment to pressure Snowflake’s existence in the market and its ability to compete. The company’s secret sauce is indeed partially controlled by them. Another blow to the Snowflake bulls is that their architectural elements are not innovations but mere sophistication of a technical design which can be replicated by any other firm and thus indefensible. Snowflake’s first analyst rating is already ‘Sell’.

Snowflake’s CEO Frank Slootman is an investment trifecta with Snowflake being his third blockbuster IPO, with 25 years of experience in investment and tech industry. Let’s not hope that he would have to plan for his fourth IPO of, yet another startup.

Sources:

https://seekingalpha.com/article/4376345-snowflake-rejoinder-to-10-bear-arguments

https://www.wsj.com/articles/behind-snowflakes-debut-rising-data-demands-11600728414