Snowflake IPO Preview: The $35 Billion Bull Thesis

We look at why Snowflake is currently shaping up to be one of the most hyped initial public offerings of 2020.

Snowflake IPO preview

With many anticipating that Snowflake could be one of the largest IPO’s of 2020 – we examine some of the key things investors and traders should know before the company lists, including:

What is Snowflake?

Founded in 2012 – Snowflake is a technology-focused, cloud-centric data-warehousing company aimed at assisting enterprises with their diverse data needs.

Snowflake's core technology, the Cloud Data Platform lets ‘customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data.’

What this means is that Snowflake’s customers can more easily and tangibly harness their data, potentially helping them optimise business processes, develop new revenue streams and gain fresh business insights. Underscoring the company's customer-centric nature and unlike many other providers in the software as a service space, Snowflake only charges its customers for the data they use.

Though many companies have often attempted to deploy in-house solutions to cater to their data needs – as Snowflake’s management points out – these ‘Legacy database architectures have inherent scalability and capacity constraints.'

Not only that, but as the company argues: existing data technologies are not built for the modern world's dynamic and diverse data demands, they are difficult to scale and use, and are expensive to manage and maintain.

By comparison, Snowflake's management posits that its Cloud Data Platform is easy to use, scalable, removes the cost, time, and resources of managing one’s own data needs and is highly secure.

Snowflake IPO date 2020

While the exact timing of the IPO remains uncertain, with the company releasing its S-1 filings to the Securities and Exchange Commission (SEC) in August, some have speculated that the company could list as early as September or October 2020.

Snowflake is poised to trade under the ticker SNOW once listed.

Key operational metrics unpacked

Though Snowflake’s core business is undeniably complex from a technical perspective – its product offering has proven increasingly attractive to a number of medium and large enterprises. This, in turn, has seen Snowflake’s operational metrics surge in recent times, with revenue and net retention figures, proving especially impressive.

Indeed, according to analysts from Forrester Research, when ‘compared over a dozen vendors, Snowflake has been positioned as a Leader. Enterprises like Snowflake’s ease of use, low cost, scalability and performance capabilities. Unlike many cloud data warehouses, Snowflake can run on multiple clouds such as Amazon, Google or Azure, giving enterprises choices to choose their preferred provider’ – via TechCrunch.

Looking at the company’s most recent operational metrics, as part of the IPO prospectus, Snowflake reported:

  • Second quarter revenues of $133 million, up 121% year-over year
  • A net retention rate of 158%
  • 3,117 customers, 56 of which contributed over $1 million in revenue
  • A gross margin of 66%, for the six months ending 31 July, 2020
  • 500 million daily queries

Snowflake’s net retention rate appears particularly impressive, with management noting that customers typically expand their usage of the platform after being onboarded. The implications of such stickiness is equally important, with the company touting the implications of these network effects, saying:

‘The more customers adopt our platform, the more data can be exchanged with other Snowflake customers, partners, and data providers, enhancing the value of our platform for all users.’

Some of Snowflake’s largest and most prominent customers include: Adobe, DocuSign, Dropbox, Micron, Sony, Office Depot and Logitech.

Beyond attracting customers, Snowflake’s product offering and operational performance has attracted a bevy of high profile investors in the lead-up to its IPO – with the company’s raising some $479 million during its latest funding round – valuing the company at $12.4 billion, on a pre-public basis.

All up, Snowflake has raised a total of $1.4 billion across eight funding rounds.

Some of Snowflake's key investors include, Salesforce, Dragoneer Investment Group, ArdenPoint Ecommerce, Human Capital and Meritech Capital, according to PitchBook.

Despite Snowflake's impressive growth, the company remains loss making – reporting a net loss of $171 million for the six months ending 31 July.

How much could the company raise?

Though Snowflake said it aimed to raise $100 million as part of its S-1 – analysts from Renaissance Capital argued that this number is likely a placeholder, positing that Snowflake may raise up to $2 billion as part of its public offering.

Renaissance's analysis was proven correct on Tuesday, with Snowflake releasing an updated prospectus with the SEC – wherein the company said it would issue 28 million shares (class A common stock) and raise as much as $2.73 billion in the process.

Regardless of how much Snowflake eventually brings in, analysts from Moor Insight & Strategy argued that the company ‘needs the funding as it needs to expand its product footprint to encompass more than just data warehousing. It should be focused less on niches and more on the entire data lifecycle including data ingest, engineering, database and AI’ – via TechCrunch.

How to trade or invest in the Snowflake IPO

As soon as Snowflake publicly lists you will be able to trade or invest in the company through IG’s world-class trading platform.

You will be able to do this in two ways: either through share trading or derivatives trading. While share trading allows you to own a company's shares outright, derivatives trading – including CFD trading – will allow you to trade on the price of shares rising and falling, without owning the underlying asset.

To trade or invest in Snowflake shares, once the company lists, follow these steps:

  1. Learn more about the Snowflake IPO
  2. Decide whether to trade or invest
  3. Create an IG account
  4. Open and monitor your position

Snowflake key personnel: who manages the company?

Name

Title

Frank Slootman

Chief Executive Officer and Chairman

Michael P. Scarpelli

Chief Financial Officer

Benoit Dageville

President of Products and Director

Christopher W. Degnan

Chief Revenue Officer

Jeremy Burton

Director

Teresa Briggs

Director

Carl M. Eschenbach

Director

Mark S. Garrett

Director

Kelly A. Kramer

Director

John D. McMahon

Director

Michael L. Speiser

Director

Jayshree V. Ullal

Director

Snowflake IPO underwriters

According to Barrons, Goldman Sachs, Morgan Stanley, JP Morgan, Allen & Co and Citigroup are acting as the lead underwriters for the offering.

Stifel, Oppenheimer, D.A. Davidson, Cowen and Company, Canaccord Genuity, Deutsche Bank, Barclays and Credit Suisse, and others, are also serving as underwriters for Snowflake's IPO.

Snowflake share price: $75-85 per share, and the $35 billion bull thesis

All of this leads us to the key question behind any IPO: At what valuation will Snowflake list? Or maybe more relevantly for investors: what is a justified valuation for a company growing as fast as Snowflake?

MKM Capital analyst Rohit Kulkarni believes that Snowflake could fetch an IPO valuation of between $20 billion to $21 billion, with the ‘potential for significant upside, given Snowflake’s rare-air growth rate, secular tailwinds, and emerging use cases’ – via SeekingAlpha.

Snowflake’s growth has indeed proven impressive over the last eight quarters – rising a little over 350% in that period. See the table below:

Revenue growth (in millions) – Q3 FY19 to Q2 FY21

Q3 19

Q4 19

Q1 20

Q2 20

Q3 20

Q4 20

Q1 21

Q2 21

$29

$37

$44

$60

$73

$88

$109

$133

On Tuesday, Snowflake validated this bullish view, releasing an update prospectus with the SEC – wherein the company cited a $75 to $85 IPO share price range. At that high watermark, Snowflake would have a market value of $23.7 billion, according to Bloomberg.

Unsurprisingly, framed against that staggering growth, according to Mr Kulkarni’s bull thesis, Snowflake's valuation could potentially exceed $35 billion on its first day of trade, should investors value the stock on ‘some combination of premium multiples comparable to best-in-class operators such as CRWD/DDOG/ZM/SHOP’ – also via SeekingAlpha.

At the time of writing, CrowdStrike (CRWD), Datadog (DDOG), Zoom (ZM) and Shopify (SHOP) all trade at significant premiums to the market – in part due to their explosive growth trajectory and sticky user base.

A comparison of these four companies is provided below:

Company

Share price

Price to sales

YTD performance

CrowdStrike

$125.19

40.28x

153%

DataDog

$79.57

43.81x

116%

Zoom

$369.89

80.88x

438%

Shopify

$973.02

54.81x

138%

Mind you, Snowflake’s Chief Executive Officer – Frank Slootman – appears relatively indifferent to what valuation the company may fetch upon listing, recently telling the San Francisco Business Times:

‘The reason is that our growth trajectory is so fierce and our addressable market is so large. When companies grow so fast, as Snowflake has, the valuation may seem like a big number now but not later.’

According to estimates, the company’s total addressable market (TAM) is indeed large, with Snowflake’s management estimating the company’s market opportunity for its Cloud Data Platform at $81 billion.

Other markets relevant to the company include the Analytics Data Management and Integration Platforms and Business Intelligence and Analytics Tools markets, which the IDC estimates will have a combined value of $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,’ the company flagged, as to highlight Snowflake's positive future prospects.

Trade over 17,000 markets: long or short

Hone your trading skills before the Snowflake IPO by creating an IG Demo Account today. With a Demo Account you immediately gain access to over 17,000 tradeable instruments – including shares, indices and currencies.

When you open a demo account with IG, you’ll be given immediate access to a version of our online platform, along with a pre-set balance of virtual funds to practise with.

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*All figures in USD unless otherwise noted.


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