It's the biggest software IPO ever. Snowflake is now listed on the stock market, but should investors pile in?
Oh diddums, now Snowflake is listed on the stock market should investors plough in?
When I was a kid, a snowflake was something that fell from the sky in winter and created hours of fun. These days the word "snowflake" refers to kids. Or at least it refers to millennials. I have never understood the snowflake description. Since time immemorial older generations have scratched their heads and wondered about the younger generation and what was becoming of the world. Do those who call today's younger generation snowflakes remember that? The hippy generation, the generation that believed in flower power accuses millennials of being snowflakes — it's too rich for words.
But there is one big difference between millennials and their elders, and the difference can be defined by the phrase 'digital native.'
Now I am not saying that if you are of a certain age, you don't get digital. But what I am saying is that firstly, you are less likely to get it, and secondly you are a lot less likely to have absorbed the cultural changes that digital has created.
Digital technology has created a more collaborative way of working, it has created greater familiarity between people around the world, and it has changed attitudes to ownership.
It is this third point that bears relevance to Snowflake the company which was recently IPOed, and already has a market cap of $63 billion. Shares are trading at $228. Before IPO, shares were expected to be priced between $100 and $110. So the IPO was quite the success.
In the company's latest quarter revenue was $133 million, and net income was minus $77 million. So the company's shares are trading at quite the P/E ratio too.
On the other hand revenue in its last two quarters increased 150 per cent on the same period the year before.
The cloud has had a transformational impact on business because it has changed IT infrastructure from a fixed cost to a variable cost.
As AI (or machine learning) in combination with data makes an ever more important contribution to the economy, this ability to turn IT infrastructure up or down on demand will become ever more important.
It means that an awful lot of computer power and software tools are no longer owned by business. The same applies to our music collection, of course — there was a time when our album collection was like a part of our furniture. That has changed. See Netflix replacing DVD collections and Spotify replacing record collections as analogous to the cloud replacing IT infrastructure.
Snowflake is in the warehouse-as-a-service business. In practice, this means Snowflake offers a data storage and analytics service — on demand.
Its main rival is a product called Redshift Spectrum supplied by AWS — Amazon Web Services.
Snowflake is primarily of relevance to individuals who work extensively with data, for example, data scientists.
Snowflake warehouse-as-a-service product seems to tick a lot of boxes, as this review on Medium shows. Snowflake's Cloud Data Warehouse — What I Learned and Why I'm Rethinking the Data Warehouse.
What's the market potential? PwC has projected that AI will contribute $15.7 trillion a year to the global economy by 2030.
Products like the offering from Snowflake will be a small but important part of this $15.7 trillion business. Let's say that the market valuation of a sector will be ten times its annual contribution to GDP. That means the AI/data business will be worth $150 trillion by 2030? Do I think a valuation of this level is realistic? Of course not. Apart from anything else, the economic gains from AI and data will accrue to brands, healthcare companies, logistics and transport industries, (among others) as well as tech firms that enable it. But put these massive numbers in the context of the current valuations of techs. Yes, I think the current tech correction has further to fall. We may even see a tech stock crash. But I believe that by 2030 many of today's techs will be worth more than at present.
Snowflake and Warren Buffett
One person who is not a snowflake in the millennial sense is Warren Buffett. But the sage of Omaha, like many others, missed the Google IPO — I seem to recall he thought the valuation was a touch crazy.
But what people missed at the time of the Google IPO was how cost-effective keywords sponsorship would prove to be for advertisers. One company that did get Google was GEICO, a US insurer that is owned by Buffett's wee little company, Berkshire Hathaway.
GEICO was an early advertiser on Google — if only Warren had spoken to the ad guys who worked for the company he owned, he might have spotted the Google opportunity.
GEICO is also an enthusiastic user of Snowflake.
And one of Berkshire Hathaway's more trusted investment managers is Todd Combs who also happens to be chief executive of GEICO.
And maybe it was because of Combs that Berkshire Hathaway has gone against normal practice and invested in Snowflake at IPO.
Charlie Munger, Warren Buffett's number one, said of the investment: "We could see in our own operations how well that Google advertising was working and we just sat there sucking our thumbs, so we are ashamed. We're trying to atone."
Another important point about Snowflake is its partnership with Salesforce— market cap $223 billion. Salesforce Ventures was an early-stage investor in Snowflake, and the Snowflake product dovetails nicely with the Salesforce offering.
Momentum is currently against tech stocks, at least they have taken a hammering over the last week or so. But long-term, there is a chance investors will look back at the Snowflake IPO and say "weren't those shares cheap?"
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees