Snowflake just boosted its IPO price yesterday, meaning that they will most likely raise more capital with a higher company valuation than initially expected.
What is Snowflake?
Snowflake is a cloud data management company. They provide a data warehouse that they promote as faster, easier to use and more flexible than those of competitors. Their data warehouse is based on a new SQL database engine, which is uniquely designed for the cloud. Although it is similar to other cloud computing companies, they also offer more functionality and unique capabilities. Customers can easily discover, exchange and securely share data.
Snowflake was founded in 2012 and is based in San Mateo, California. The founders are three data warehouse experts, two of them coming from Oracle as data architects. Since its foundation, the company has not stopped raising money, with multiple funding rounds with venture capital backers such as Sutter Hill Ventures, Sequoia Capital, Redpoint Ventures, Iconiq and Wing Venture Capital.
About the IPO
A little before its expected IPO price date, Snowflake boosted its expected initial pricing range from $75-$85 to $100-$110 per share. This indicates a strong interest for the deal from investors, which will allow Snowflake to raise even more capital. The date of the official launch has not been settled yet, but it is said that the company should be introduced around Wednesday next week on the New York Stock Exchange under the ticker symbol “SNOW”.
Assuming that we fall on a $105 price, the company can expect to receive net proceeds of $3.3 billion, up from $2.7 billion. After the IPO, Snowflake is expected to be worth between $27.7 billion and $30.5 billion, up from the previous $20.9-$23.7 billion expected valuation. This would mean that, at the midpoint, Snowflake would be valued at 72 times its trailing-12-month revenue of $420 million, a very high multiple, even in a field where it tends to be high. Software-as-a-service companies (SaaS) like this one usually fetch a premium valuation since they provide a critical service for companies generating high-margin recurring revenue.
Snowflake will have a dual-class structure designed to preserve control among insiders, something we see often in tech companies. Class B shares have 10 votes while insiders collectively keep 98.5% of the total voting power.
Note that it is not impossible that the price grows even more, as the deal keeps attracting the eyes of investors.
Investing in this IPO
Investing in an IPO is not without risks. Individual investors usually do not get allocated shares at their initial price, especially when the interest for the IPO is high. Investing at the beginning, where the company is young and has a small track record, and when it might sometimes be over-valued means additional risk.
A promising company does not directly translate into a great investment. If we take the time to think back about Uber and Lyft, both were expected to be amazing investments, but they declined 12% and 62% respectively since then. Early pre-IPO investors could not be happier, as you might imagine.
Snowflake recently announced that the IPO would be backed by Berkshire Hathaway and salesforce.com, investing $250 million each. In addition, Berkshire Hathaway will buy 4 million shares from the CEO in a private transaction, raising their participation to half a billion. The most surprising thing is that, in 54 years, Berkshire Hathaway rarely ever entered an IPO. If the famous Warren Buffett breaks such a golden rule to invest in a company, is this a great sign of credibility?
Salesforce Venture - the private equity arm of Salesforce has what you could call a great track record, with successes such as Zoom, Twilio and DocuSign, all three very successful since their debut.
Finally, this very high price does not come from nowhere. Indeed, for the fiscal year ended Jan 31, 2020, Snowflake reported revenue of almost $265 million, up 173% since the previous year. Over the past 8 quarters, the revenue has risen up from $29 million to $133 million, with a 158% revenue retention rate.
As Sean Williams, journalist at the Motley Fool says well: "Snowflake is arguably the most anticipated technology/cloud/SaaS IPO of 2020, if not of the past couple of years."
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