14 Sep Snowflake (SNOW)

September 15^th 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

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