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Snowflake (SNOW)

September 15th has been set as the date for what will likely be the largest IPO of 2020 and it is an exciting one. We are recommending clients buy into this one up to a price of $90

Snowflake is a technology company that makes software that companies use to house vast amounts of data in the cloud and it has seen some eye-popping growth over the last year.

For the year ended Jan 31, 2020, Snowflake reported revenue of nearly $265million, up 173% year over year. This has continued in the first half of 2020 when revenue of $242million, up 133%. This means the revenue for the first six months of this year is nearly the same as for all of last year.

It is important to note the company does not yet make a profit, losing $171million in the last six months. But technology companies rarely trade on earnings. It took Amazon decades before the company turned its bottom line black but that did not stop the record rise in the share price.

As you will be aware, most companies now use the cloud to store data. But one problem they experience is lag when they have many users all trying to access that data at the same time, resulting in sluggishness.

Speed is a big deal for medium and larger enterprises. The promise of the cloud is the ability to scale up and down as you need. Which is great in theory, but if the system is so slow end users get frustrated, the benefits quickly erode

Enter Snowflake. Their software stores the data in a different way, in packets, and only pulls down the packets needed. This speeds everything up and users get the experience the cloud promised.

The potential for Snowflake is so large, it lured Frank Slootman to become CEO in 2019. Previously Slootman oversaw the rapid growth of ServiceNow (NOW), a cloud-based information technology company beloved by large and medium enterprises.

Those customers are also the same target market for Snowflake.

Other interesting numbers in the S-1 filing for the IPO show the average revenue per customer at Snowflake is $111,000. More impressive, based on revenues, the company had a 158% net retention rate. This means, not only do they keep most customers for a long time, but those customers tend to spend more year after year. That is a wonderful thing for future growth.

Snowflake has also attracted some impressive buyers, not the least of which is Berkshire Hathaway. Warren Buffet’s company traditionally avoids tech companies, but they are taking a stake of a $500million in a private placement along with the investment arm of Salesforce.com.

We all know Warren Buffet and for a tech company to attract him, it must be something special. Salesforce also have a good track record of investing in early-stage start-ups having invested in Zoom Video, Twilio and Docusign, each of which has been hugely successful since its public debut

IPOs are often hit and miss, but if you get the right one, it can really become a game-changer. Look at this list of technology IPOs and the profits made. Snowflake could well do the same

Company IPO Date IPO
Price
Close Price
11/9/2020
Total
Return
MongoDB October 2017 $24 $214.51 794%
Twilio June 2016 $15 $233.50 1,457%
Zoom Video April 2019 $36 $369.89 927%
Shopify May 2015 $17 $973.02 5,624%

We expect the IPO to be very popular and you could well see the share price trade a lot higher on the day. The guidance for the IPO price is $75-$85. We are recommending clients purchase SNOW shares but at a price under $90

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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