A Look At Snowflake's S-1

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed nor a registered financial expert. Please see a financial advisor before making investment decisions.

Lately, Snowflake filed their S-1 as it is looking to go public. With tech valuations being higher than never, many startups are looking to take advantage of these times and go public. As the economy continues to take a toll from the coronavirus pandemic, Snowflake happens to be thriving at the same time. 

What makes Snowflake a unique company isn't its fast-growing revenue. It's the business Snowflake is in. Snowflake created a technology that allows companies to store and manage their data in the cloud. Because Amazon, Google, and Microsoft are the two other big companies that are doing that, Snowflake is essentially a direct competitor to these firms and specifically to their core businesses. In other words, Snowflake is a direct competitor to AWS, Azure, and GCP (Google Cloud Platform). 

When you see companies like Amazon, Microsoft, and Google, cloud computing has been their biggest source of profits and growth. What makes Snowflake different from these other tech giants is that Snowflake is a pure-play on the cloud computing business. Google, Microsoft, and Amazon all have other businesses that they can rely on if ever the cloud computing market collapses.

A Deep Dive Into The S-1

When you first look at the S-1, you'll find a few pages where Snowflake has posted their own branded content. The content is easy to read, looks nice, and highlights the great things about the company and the industry it's in. 

There's a page that's titled "Data Cloud" and in it, you'll find the innovations that have happened in the industry and the layers of it. First, you'll find the cloud-native architecture, and then in 2014, the cloud data warehouse has given superior performance. After, you find the cloud data platform that was created in 2019 that gave way to the workload & user expansion. Then we arrive at the data cloud in 2020 where you have content vectors & network effects. 

A page later, you'll find the highlights of the company's financials and userbase. Having a 121% YoY revenue growth is insane and with a 158% net customer retention rate, it speaks a lot about how Snowflake's customers are loving the business. On the next page, you'll find that they've always been growing their revenue since Q3 2019 and that their revenue amounts per quarter have been growing exponentially. Snowflake is a fast-growing company.  

From the Prospectus Summary, this line stood out to me:
"our customers included seven of the Fortune 10 and 146 of the Fortune 500..."

Having seven out of the Fortune 10 companies use their services is amazing. At the same time, I do wonder if the other three Fortune 10 companies are Google, Amazon, and Microsoft. Meanwhile, Snowflake looks to have over 20% of the Fortune 500 companies as its customers.

Snowflake is a play on the aging data storage infrastructure. The legacy databases not only keep data scattered but they aren't able to accommodate larger volumes of data. With the more becoming digitalized and more data is being gathered, stored, and analyzed, legacy databases can't handle the larger swathes of data and often charge customers more for storing more data. Plus, there are many other issues that are prompting companies to send their data to the cloud. Snowflake has been able to create better solutions for businesses looking to become more digitalized. 

What's interesting about Snowflake is that while they compete against AWS, Azure, and GCP, their services are offered across those three public cloud platforms. So even if Snowflake does succeed in taking more market share from those tech giants, as long as Snowflake operates on those platforms and doesn't lead clients into their own platform, AWS and its peers will still maintain relevancy and continue to generate profits. 

When it came to risk factors, I rarely see this risk factor for many tech companies but because it was geographically focused, I had to point this out:

"Our United States corporate offices and certain of the public cloud data centers in which we operate are located in the San Francisco Bay Area and Pacific Northwest, regions known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our facilities or the facilities of our public cloud providers could result in disruptions, outages, and other performance and quality problems."

To sum it up, Snowflake would be in big trouble if ever a mega-earthquake in California, especially from the San Andreas fault, happened. That is something to keep in mind as 2020 continues to come up with unexpected natural catastrophes. 

For the financials, while their revenue growth is impressive, their losses have swelled as well. 


*You might need to zoom in to see the full picture

If there is a big plus, it's that the company makes a huge amount of money when it comes to gross profit and it shows that the business is profitable. Because they're in the growth phase and are investing a lot in growth, they've been spending a lot on R&D, marketing, and staff. This is normal for other fast-growing startups, especially in the tech sector.

And by making millions in interest income, it looks like Snowflake has a lot of cash in the bank. 

Conclusion

Overall, being in an attractive business and having high revenue growth, Snowflake looks like an attractive stock to invest in. While I do worry about their accelerating losses, with high revenue growth of 121% and net profit margins of -70%, using the Rule of 40, Snowflake has a score of 51, which makes the startup attractive. 

Would I invest in it? If I had the money, yes. In the meantime, I highly recommend you continue doing your research on the company and to talk to a financial advisor before making an investment decision.

Invest wisely!



 


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