Friday, October 23, 2020

Five (5) Reasons Why (We Think) Warren Buffett Invested in Snowflakes IPO

Snowflake Inc. is a cloud-based data-warehousing startup founded by Marcin Zukowski, Thierry Cruanes, and Benoit Dageville in 2012. It is similar to Google BigQuery and Amazon Redshift that helps analyze a vast amount of data in real-time. Last week, Snowflake made a Wall Street history with the largest software stock market debut that sold 28 million shares and raised nearly $3.4 billion from the IPO.

Aside from the impressive debut that made Snowflake the largest software IPO, now valued at $70 billion, what makes it one of the buzziest tech IPOs ever?

The answer is, Warren Buffet of Berkshire Hathaway, who is notorious for steering clear of tech stocks with notable exceptions invested $250 million dollars on it. What makes this move for The Oracle of Omaha more intriguing is that Snowflake is a money-losing company that had $171 million net loss last year.

Based on our studies, here are five (5) data-backed up reasons why (we think) Warren Buffet invested in Snowflake:

1. In the most recent quarter, Snowflake reported a growth of 121%

Snowflake is growing like crazy. It delivered 173% growth in the fiscal year ending January 31, growing from $96.7 million to $264.7 million with gross profit margins of 56.2%. Revenue grew to 133%, and now to 121% growth. Despite the decreasing revenue growth, this is not bad news for Snowflakes by any means considering its very young age of six (6) after its product came out of stealth mode.

2. Snowflake has 158% net dollar retention rate – one of highest for public SaaS companies

According to Forbes, the Net dollar retention rate is a key metric for SaaS companies because it helps to predict cash efficiency by calculating inflows of revenue minus outflows of downgrades and churn. The benchmark that SaaS companies are shooting for is between 100%-106%. As Snowflake’s customer experience the benefit of the platform, they migrate more of their workloads to its data warehouse that increases client consumption and storage.

3. 26% of Snowflake revenue comes from Fortune 500 companies – 146 of the Fortune 500 and 7 of the Fortune 10

Snowflake is used globally by organizations of all sizes across a broad range of industries. Its S-1 showed an impressive list of large companies ranging from technology like Doordash, Square, Adobe, Instacart to financial services companies like Capital One and manufacturing/retail companies like Sony and Logitech.

4. Average revenue per customer is roughly $160 with 56 customers that pay over $1M in trailing 12 months

The number of customers that contributed more than $1 million in trailing 12-month product revenue increased from 22 to 56 as of July 31, 2019, and 2020 respectively. Large customers mean greater opportunity for Snowflake to sell additional capacity. The number of customers under capacity arrangements that contributed more than $1 million in product revenue in the trailing 12 months was counted to attract large enterprises to the platform

5. Snowflake has the highest rule of 40 

The Rule of 40 is a software industry rule of thumb that says the company’s revenue growth rate plus profitability margin should be equal to or greater than 40%. It measures the balance between growth, profitability, and sustainability. At 93%, Snowflake has the 4th highest rule of 40. While Snowflake is not profitable yet, it is included in the exclusive list of rule 90+.

Snowflake operates in a highly competitive market dominated by big tech companies like Microsoft, Amazon, and Apple but the need for cloud data warehouse increases as we enter a more advanced and centralized world.

What other reasons do you think made Snowflake in Warren Buffet’s rare exceptions in technology? 

You may also like

Don't Miss

More from Author