Venture: Will Snowflake Stick Or Melt

IPO Day for Snowflake on Wall Street

Data-warehousing company Snowflake has made their debut to the public markets this week and are flying high, with an opening price of $120 on Tuesday and a current price of $240. This is a common phenomenon among new tech companies, ‘hype’ and momentum fool investors into imagining ceiling-free growth.

Snowflake is a Californian tech firm that aids other firms in their cloud data storage and management. The cloud, for those not in the know, is an online storage apparatus created by a series of networks and servers to provide greater space and safety for data. Snowflake’s primary users are companies like Electronic Arts Inc. and Capital One Financial. These two large companies have entrusted Snowflake with massive amounts of personal information and data analysis, a true testament to Snowflake’s commercial credibility.

IPO

Currently tech IPOs have been seeing great success. The pandemic has forced many to realize (with more free time and the need for frugality) that money ought to be invested for growth, instead of sitting idly in a bank account. Many look at the now robust prices of Google and Apple wondering why they had not invested earlier, attracting many to new tech stocks. Some other companies that have rumored to go public this year are Robinhood (an online brokerage app) and Airbnb (the online rental giant). These companies both have evaluations for $10-30 billion and with already high exposure it is difficult to estimate how high these prices will go. IPOs have been placed in a precarious position since the pandemic started, as it has been difficult to effectively value firms.

Snowflake has been a privately held company since 2012, steadily growing since without the need for any public investment. When a company has such steady growth, it begs the question as to why they would want or need public investment. Before the pandemic Snowflake was doing very well, but as online work and schooling continue to increase the need for cloud capabilities and management firms like Snowflake have ballooned.

This growing demand has also led to increased interest in the firm itself, as it is naturally in a position to benefit from the current ‘black swan’ event. The company began to attract big names ahead of their listing, such as Warren Buffett and Marc Benioff, both of whom managed to secure a private placement of $250 million at the IPO price. With the strength behind these large investments it gave smaller investors more confidence to invest in Snowflake, helping the share price gain momentum.

Snowflake CEO Frank Slootman discusses Warren Buffett's interest in the company

The company’s recent rapid growth can be attributed largely to the firm’s foundation. Snowflake’s business model is centered on allowing customers to access, explore, and utilize their own data. The promise of ‘big data’ unlocking tremendous profits for firms has been extolled by many, and Snowflake has aimed to serve as the key for its clients. From the outset they have gained the trust of several important customers, building a reputation that one cannot ignore.

Market Performance

Snowflake was listed on the NYSE September 16, 2020 at $120 a share; its target IPO was between $100 to $110 per share. Only a few days later the shares were hitting highs of $240, making for a historic IPO among US tech companies.

This hot tech stock reveals that investors are still trusting the American business model and with time the economy will see a positive change. When Snowflake’s chief executive Frank Slootman was asked what this new level of investment will do to the company, he stated, “It’s a vote of confidence. But clearly as a management group and as an employee base we have to work very hard to deliver on it.” Slootman views the volatile economic climate as advantageous, with interest-rates at historic lows there is greater room for growth.

Snowflake Executives Wealth

Chief investment officer of Firsthand Capital Management stated “When you’re in a recession, growth is hard to find. It’s a scarce commodity. When you find something scarce, you’re going to have to pay up.”

With such a high valuation, the bar is set even higher for Snowflake’s performance and ability to handle increasing volume. With a growing customer base Snowflake will have to adapt to serve on a grander scale, without compromising the value-adding services that entranced early clients. Snowflake’s plan with this new round of investment is to fund its growing operations, while potentially making acquisitions.

Snowflake’s largest challenge ahead is facing competitors who are more established and have the scale to address increased demand. For example, Amazon and Microsoft both have cloud computing sectors and offer services and products comparable in quality to Snowflake. It is vitally important for smaller companies like Snowflake to poach customers from more established firms in order to feed growth.

One advantage that Snowflake gained from this pandemic is how volatile the equity markets have been. With high levels of uncertainty on how the economy would react to this pandemic many investors pulled their money out of the market, when most experienced investors took advantage of low prices in prime sectors. Snowflake was able to leverage this pandemic to its advantage, realizing that the market is inflated right now, their stock will be too for a period of time. It is likely that over the coming years or months Snowflake will settle into its inherent value, but for now can utilize the effects of Covid to their advantage.

Overall, Snowflake’s initial success is seemingly indicative of a true winner. Demand for Snowflake’s services has led to a  141%  growth year-over-year over the past four quarters, and there are no signs of slowing down. Analysts have stated that the cloud-computing market could hit $16 billion by 2023, and with 28 million shares offered in Snowflake’s IPO, everyone has the chance to profit off the burgeoning industry.