Snowflake’s IPO

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 la