When Snowflake made its market debut, the immediate things that stood out most were its long list of premium investors who had an overwhelming demand for its shares. People were willing to buy Snowflake IPO (NYSE: SNOW). After its management initially planned to price its IPO between $75 to $85, it later boosted it to $110 before it was officially priced at $120 per share.
On its first trading day, Snowflake’s stock would double, making it the biggest software IPO in United States’ history.
On the Point-of-Sales basis, Snowflake currently sells for more than 150 times trailing its 12-month sales. This begs the question, what is it about Snowflake’s IPO that makes it so attractive to investors? Read below for the top reasons why investors are buying into this IPO and what this means for the company’s future.
A Large, Growing Opportunity
While Snowflake’s current market may look more like a popularity contest in the short term, it’s always important to buy into a company based on its performance in the long run. And one of the best ways investors can assess Snowflake’s prospects is learning and understanding its market opportunity. Snowflake is no different.
Regulatory filings with the Securities and Exchange Commission provide a compelling view of Snowflake’s market opportunity by claiming that the addressable market opportunity for its Cloud Data Platform was approximately $81 billion by January 31st, 2023. This forecast meant that the company’s total addressable market would be upwards of $160 billion in the future.
For the fiscal year ending January 31st, Snowflake generated $265 million in revenue, which was a drop in the bucket. Even if the company’s management estimates seem a little too ambitious, it still illustrates that Snowflake has a long runway and market opportunity for growth.
Snowflake’s Product Is A Unique Market Fit.
Snowflake is the best data warehouse and business analytics provider on the cloud. The company uses the Big Three company providers, Microsoft Azure, Google Cloud, and Amazon Web Services, without requiring the enterprise customers to invest a lot of time or energy setting up guard rails and configuring the product.
Customers can also use Snowflake’s SQL commands and easy integrations with third parties using this enterprise-ready data warehouse. You simply need to transfer data from Snowflake’s on-premise systems to the cloud. The best part about using Snowflake’s data warehouse service is that there aren’t any limitations to its actual server size or storage. As a result, enterprises don’t necessarily need to buy large server size commitments.
The company also manages scale up and scale down server size or storage automatically based on the customer’s query needs. This enables data transformation for ETL jobs to run concurrently. Therefore, market analysts don’t really have to wait for the completion of the ETL jobs before running their queries. Enterprises that use Snowflake claim that the data warehouse produces up to 95% faster runtime compared to most data warehouses, with Rauken Rewards being a major beneficiary in this regard.
Snowflake’s Frictionless & Scalable Customer Acquisition
Based on most investors’ experience, Snowflake’s customer acquisition has proved to be relatively fast and frictionless. It also requires very minimal human intervention, which is a bonus. Novice customers of Snowflake’s IPO claim that they can easily browse the company’s website, create a trial account in just a few steps, and start onboarding data. The entire process is simple and easy to understand.
If you are happy with your experience using Snowflake’s product, you can go ahead and buy additional credits for computing and storage. Customers can also attend the company’s free instructor-led lab, where they can ask any questions regarding the product to optimize their query process.
Data Share is another critical method of customer acquisition that makes Snowflake the desired option for most investors. If you have a data partnership or agreement with another enterprise, Snowflake can promptly share your data and any updates with that enterprise (second party) with little hassle. The second party would receive a Snowflake instance created to make a copy of the data share available. This product strategy should help the data warehouse company to reach even more enterprise customers with zero sales/marketing investments.
A Massive Secular Tailwind
Snowflake has made a name for itself as the best-renowned cloud service provider globally. Up until the Covid-19 pandemic struck, the digital transformation of the data warehouse giant was already ongoing. But the pandemic has also significantly boosted enterprise’s demands for cloud computing as remote work and other distributed workforces become the rule for most businesses. A recent study by MariaDB found that over 40% of IT executives had accelerated their businesses’ moves to the cloud due to the pandemic.
Gartner, a research company, estimates public cloud adoption to grow over 50% by 2022. Thereby achieving a 14% annual compound growth rate – even as IT professionals cut back spending in other enterprise areas. Therefore, you will find more businesses using data warehouse and analytics services. And Snowflake is the current best option available in the market.
Snowflake’s Competition Investor Advantage
- Cloud optimizations increase gross margins – data shows that enterprises are getting a lot better at managing costs and optimizing resources using cloud computing. Snowflake uses these public clouds continuously to optimize techniques and increase its growth margins overtime. As it acquires more customers, we should expect Snowflake’s network effect to scale its cloud computing usage, and further drive its gross margins.
- Infinite destinations to activate insights – like most cloud service providers, Snowflake also has use cases for actionable insights that are infinite since Snowflake supports sending information to different endpoints, depending on its use case. For instance, for driving connected experiences, the data warehouse company must enable integration using Adobe Campaign. For a business-wide visualization use case, Snowflake has existing connectors with Sigma, Tableau, and more.
- Continued top-line growth – although the Coronavirus has contributed to digital transformation and cloud adoption for most businesses, there are still several growth opportunities available worldwide that Snowflake can adopt.
A Lower Price for The Best Offerings
Snowflake’s services are all the rage at the moment and the main thing that investors are talking about right now. It’s no doubt that Snowflake’s services are mentioned in the same range as Redshift, a similar product by Amazon Web Services. But Snowflake’s big-league rivals don’t stop there, as it also includes other large infrastructure partners the likes of Alphabet’s Google Cloud and Microsoft Azure.
As of writing this, Snowflake’s offerings operate over cloud infrastructures of some of its biggest partners. Ironically, its biggest partners also happen to be its fiercest partners.
Still, studies show that Snowflake triumphs over the competition for several reasons. For example, its storage and compute are bundled in rival offerings. Therefore, if you need more storage, you’ll have to purchase more nodes. This subsequently means paying to have more computing power. Snowflake also allows customers to pay separately for storage and compute uses. Thus, customers only always pay for what they need. Paying for only the storage space you need is a lot more convenient, especially when compared to its competition’s subscription plans.
Stunning Growth Rates
Another critical factor that has captivated investors is Snowflake’s impressive growth. This is evident from the company’s fiscal year that ended on January 31st, which saw its revenue grow 174%. Since then, the company has maintained its triple-threat growth, showing tremendous potential.
Equally impressive is the data warehouse’s 158% net revenue retention rate as of July 31st. Simply put, existing customers continue to expand their relationships with Snowflake, spending about 58% more this year than they did this time two years back.
The Buffet Factor
The Warren Buffet backed Berkshire Hathaway’s interest in Snowflake also plays a critical role in grabbing investors’ attention. Berkshire Hathaway’s significant investment in the newly pledged public company helped make it one of the most lucrative and attractive IPOs in the market. So did the investment of salesforce.com, an enterprise software powerhouse, on the data warehouse company.
Both companies agreed to buy $250 million worth of Snowflake’s shares at its IPO price. However, Berkshire would go further to the point of purchasing more than four million shares from Bob Muglia, the former CEO of Snowflake, in a private transaction. This investment cost Berkshire an estimated $735 million. Those shares are worth more than twice that amount now.
It’s no doubt that the star power of Warren Buffet’s name added to Snowflake’s feeding frenzy and hiked its shares. However, it’s also vital to note that this investment decision was the work of one of Buffet’s most trusted money managers, Todd Combs. But it was worth it in every way possible.
What This Means for Snowflake’s Future
While most investors have balked at the current Snowflake IPO mind-boggling valuation, most were willing to invest and get in on the action. If the data warehouse company can maintain its revenue growth while still enticing customers to spend even more each year, it won’t be long before Snowflake’s valuation looks a lot more reasonable.
On the other hand, there is already a significant growth price in this company’s stock. Therefore, it’s evident that this company should have a lot to live up to. And any failures, whether real or perceived, should be met with equally stunning sell-offs.