3 Reasons To Buy Into Snowflake’s IPO

On August 24, Snowflake, a fast-growing software startup, issued financial statements in anticipation of an IPO. I’ve written about many companies before their IPOs. However, I’ve been skeptical of most of them…

Two exceptions: Zoom Video — whose April 2019 IPO struck me as compelling — its shares are up 3.8-fold since then — and now Snowflake. Although Snowflake is losing lots of money, it is growing rapidly and I am confident its shares will soar the day it goes public.

Moreover, unless market conditions are awful the day it goes public, I expect its shares to keep rising after that first-day pop. Here’s why:

  • Snowflake’s CEO has a tremendous track record taking companies public.
  • Snowflake’s industry is large and growing fast; and
  • Snowflake’s business strategy is a winner.

What is Snowflake?

Snowflake supplies a cloud-based data-warehousing service that helps companies analyze data. Although it is losing money — posting a net loss narrowed to $171.3 million (down $6 million from the year before) — Snowflake’s sales grew 121% in the July 2020 ending quarter — far faster than rival Datadog DDOG +0.2% — whose revenues were up 68% in the latest quarter.

Snowflake is backed by an impressive array of investors — most notably Sequoia — and was valued at $12.4 billion when it last raised capital in February when it filed confidentially for its IPO, according to Reuters.

Snowflake — which has raised a total of $1.4 billion — grew even fast and lost more money on a fiscal year basis. For the year ending January 2020, revenues soared 173.7% to $264.7 million while its net loss nearly doubled to $348.54 million.

An IPO expert is expecting a positive result for investors. Kathleen Smith, principal at Renaissance Capital, told Reuters, “Even though there are losses, Snowflake’s 100%-plus growth rate will attract investor interest. The IPO market is healthy and Snowflake’s peers MongoDB MDB -0.7%, Okta and Splunk have produced strong returns for investors this year.”

Snowflake’s CEO Has A Successful Track Record

I have interviewed Snowflake’s two most recent CEOs: Bob Muglia — who ran the company from 2014 and current CEO since August 2019, Frank Slootman.

Slootman has a very successful track record of growing private companies and making money for investors. He took Data Domain public in 2007 and sold it to EMC in 2009 for $2.4 billion before leading ServiceNow’s IPO — the stock is up a whopping 18.6-fold since its June 2012 IPO.

A Snowflake IPO will not be the end of its journey. As Slootman told me this February, “An IPO for Snowflake will be an entry event not an exit. I’ve done two in my life. The IPO is an unwritten contract between employees and the company so they can realize their investment.”

Muglia — who grew Snowflake to the point where it raised $450 million in October 2018 at a valuation of $3.5 billion, according to ZDNet — must have mixed feelings about Slootman taking over his job. On the one hand, his 3.3% stake will be worth plenty when the company goes public — on the other hand, Slootman is getting the glory and owns 5.9% of Snowflake stock, according to CNBC.

Muglia is a 20 year Microsoft veteran who was responsible for its $16 billion Windows Server, SQL Server, System Center and Azure. He joined Snowflake as CEO in 2014. He told me in June 2018 that demand for…

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