(Daniel Aliwell, Ankit Mittal & Jeanne Royer)
THE COMPANY AND ITS BUSINESS MODEL
Snowflake, a cloud data-based warehousing start-up founded in 2012 is currently aiming for an IPO between now and October, with the goal to raise $100 million in the filing with the Securities and Exchange Commission. The firm produces cloud-based software for data analysis, with the aim to enable “‘any user to work with any data, without limits on scale, performance or flexibility’” (IG, 2020).
Filing initial IPO papers on Monday 24th of August, Snowflake is expected to list on the New York Stock Exchange.
The current state of the tech sector suggests it is wise for Snowflake to go public, also thanks to a considerable growth in investor interest. Goldman Sachs is advising for the IPO and has given a predicted market cap of between $15 and $20 billion for Snowflake once its listing is completed. To this day, details concerning the target price per share and the number of shares the company is looking to sell are yet to be confirmed.
In February 2020, after raising $479 million in its most recent fundraising event, the company was valued at $12.8 billion, which supports the expected valuation of $15-20 billion for its IPO (Business Insider, 2020).
The current market conditions seem highly lucrative for Snowflake’s IPO; with a huge surge in demand for the broader remote software sector, which has heavily outperformed the already rallying tech industry. The BVP Nasdaq Emerging Cloud Index has seen a gain of 65.4%, almost 23 percentage points north of the Nasdaq in the last 12 months. It comes as no surprise that IPO confidence in this space is high: the technology market provides a promising opportunity to capitalise on strong investor demand as depicted by the three other software start-ups, Unity Software Inc., Sumo Logic and Jfrog Ltd., filing for public offerings on the same day. With the industry trading at all-time highs amidst a period of high uncertainty, mega-cap tech giants reaching unprecedented milestones, and a stimulus hungry market receiving the liquidity it needs, it appears the momentum of the tech boom still has fuel.
Snowflake’s main competitors are Google Cloud Platform, Amazon Web Solutions (AWS), and Microsoft Azure, assuring a competitive market for the start-up to grow, where there is not one company controlling a market monopoly. In such a highly saturated market, Snowflake derives its competitive advantage based on its “architectural underpinnings”. Its ability to store vast amounts of data in the cloud without fear of locking oneself in to any particular cloud vendor attracts interest from investors concerned about the repercussions of vendor lock-in, and hence the ‘neutral vendor’ business model provides intrinsic backing to the IPO’s optimistic financial predictions.
With growing investor interest in cloud computing solutions and a successful fundraising round a few months before, Snowflake’s IPO is expected to be highly successful.
More specifically, when breaking down the reason for the tech boom, we must consider what types of investors are buying the stock: growth, value or GARP investors. Using the Big Four as a comparison metric will allow us to forecast the likely outcome of the listing and how it may perform in the near future of being made public.
Taking Apple as the example, its PE ratio (price to earnings) average, a metric used by growth and value investors, is at 39 (Apple, 2020). This is above the S&P 500 average of around 15, which is a signal that this is a stock and sector which growth investors are looking to invest in (S&P 500, 2020). Therefore, taking this logic and applying it to Snowflake suggests growth investors will be looking to buy shares in the company when it goes public. Not only this, but growth stocks tend to become value stocks in their later life, suggesting there is significant potential for Snowflake in the long-term when taken public, as future revenues inevitably slow, as the market has seen with the Big Four, for example. As such, there will likely be high demand for these shares, which will allow Snowflake to meet its goal of capital raised.
However, the precise valuation of the company will depend on the tech market conditions at the time of the IPO. Indeed, given the tech boom, it might be possible that Snowflake will go for more than $15-20 billion when finally going public (Financial Times, 2020).
Furthermore, it is worth considering the rapid growth of this company, which may attract greater interest from growth investors. With revenues reaching nearly $1 billion annually, revenue growth of 174% and signs of positive cash flow, there could be strong prospects for Snowflakes’ IPO (Financial Times, 2020) . Indeed, in 2018, Snowflake was valued at $3.9 billion, indicating a strong year-on-year performance, with three times as big a valuation in 2020 (IG, 2020).
Moreover, with some of the big companies experiencing a decline their annual revenue growth Apple, for instance, saw its revenue decrease 2% from 2018-2019 (Apple, 2020). Could growth investors switch their focus to the new up and coming tech stocks?
- Initial Public Offering (IPO) – the process of offering shares of a private company to the public in a new stock issuance.
- Securities and Exchange Commission (SEC) – US government oversight agency which is responsible for the regulation of the securities markets and for the protection of investors.
- New York Stock Exchange (NYSE) – stock exchange in New York which is the largest equities-based exchange in the world, based on the total market capitalisation of its listed securities.
- Nasdaq – the world’s first electronic stock exchange, second in terms of market capitalisation, based in New York.
- Market capitalisation – the value of a company traded on the stock market, which is calculated by multiplying the total number of shares by the present share price.
- BVP Nasdaq Emerging Cloud Index – index designed to track the performance of emerging public companies primarily involved in providing cloud software and service to their customers.
- Growth investors – investment strategy focused on increasing an investor’s capital by typically investing in growth stocks, which are young/small companies whose earnings are expected to increase at an above-rate average compared to their industry sector or the overall market.
- Value investors – investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
- Growth to a Reasonable Price (GARP) investors – equity investment strategy that seeks to combine tenets of both growth and value investing to select individual stocks.
- Price-to-Earnings (P/E) ratio – ratio for valuing a company that measures the current share price relative to its per-share earnings. Also known as the price or earnings multiple.
- S&P 500 – stock market index designed to track the performance of the stocks of the top 500 large-cap US companies. Investors use it as the benchmark of the overall market.
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