Snowflake’s Hot IPO
You are a business owner. Your business is selling hamburgers. Initially, you only have one restaurant from which you sell hamburgers. At this restaurant, you collect a variety of data on sales, customers, and employees. You want to analyze this data to better understand your company (e.g. which employees perform the best, what products are most popular, when demand for your hamburgers is highest). Attempts to collect and analyze the data on the same database prove to be incredibly slow, so you divide the two tasks: certain databases are designed for transactions and others are designed for analysis. The databases optimized for transactions typically serve the needs of your customers, while the database for analysis helps produce solutions to improve your business.
Success strikes, and your business begins to grow. Consequently, so does your data collection and your need for more complex analysis on your collected data. It’s difficult to continually upgrade data collection and analysis infrastructure inhouse. So, you decide to outsource. Traditionally, there are only a few companies capable of serving your company’s outsourcing needs. Oracle, Amazon, Microsoft and Google all provide cloud-based data warehousing, yet Snowflake has managed to shake up the industry despite its massive competitors.
Snowflake distinguishes itself in a few ways. Recognizing the potential of a more dynamic approach to data warehousing, Snowflake focused on serving the needs of business both big and small. In their own words, Snowflake strives to “make modern data warehousing effective, affordable, and accessible to all data users” (Kraynak and Baum 2020, 1). It is a company grounded in experience. Founded by two former Oracle engineers and filled with a variety of other software industry veterans, Snowflake is an ambitious and innovative company with a demonstrated ability to address the needs of its clients.
In September of 2020, Snowflake had an immensely successful IPO starting at $120 per share and rising as high as $245 (Owens 2020). It was the largest by an American software company ever. However, the real strength of Snowflake may have been reflected in the powerful investors that it attracted for its IPO, the likes of which included Salesforce and Berkshire Hathaway (Owens 2020). Berkshire Hathaway’s participation in the IPO is particularly notable because its legendary founder Warren Buffet has been historically hesitant to invest in technology companies. During the IPO process, Snowflake upgraded its price target several times. This upgrading was almost certainly the result of Snowflake obtaining new information that indicated an increase in demand relative to initial projections thus allowing the company to sell the same number of shares at a higher price. Much of the demand for Snowflake may be a result of its more dynamic approach to such a crucial service for business, its promising revenue numbers and other metrics such as net revenue retention rate and customer spending over one millions dollars, or its wealth of experienced leadership. But the meteoric rise of this cloud-based data warehousing company may be the result of another, perhaps equally potent factor: hype.
Clearly, hype is not the sole determinant of the success of Snowflake’s IPO. However, it isn’t insignificant. One of the most notable indicators of hype in public markets is the “IPO pop,” commonly described as an incredible surge in the share price of a recently public company. 2020 was a year filled with IPO “pops” with average first day returns around 38%, more than double the 18.4% average from 1984 through 2020 (Mackintosh 2021). Although the sector to which the most amount of capital was (unsurprisingly) allocated was health care, the technology sector had its fair share of IPO-related craziness. In addition to Snowflake, Airbnb, DoorDash, and Palantir are three tech companies who also had meteoric rises in their first day of trading.
Although perhaps a positive indicator of public excitement for a particular company, IPO pops are sometimes viewed negatively by the business community. The most common critiques about such pops is that they leave money on the table. That is, more cash would have gone to the company if the initial pricing of shares had been higher rather than to institutional investors who purchase the shares at a lower price and then sell into the “pop.” A few alternatives have emerged to the traditional IPO such as Special Purpose Acquisition Companies (SPACs) and direct listings to mitigate the money-on-the-table issue.
Snowflake, or at least its CEO Frank Slootman, paid little regard to this issue. In an interview with Forbes, Slootman dismissed critiques about the pricing of his company’s stock at its public market debut: “Now I could have moved the price higher, we certainly had the flexibility to do that. The reason we didn’t do that is I wanted to bring along the group of investors that we wanted, and I didn’t want to push them past the point where they really started to squeal” (Konrad 2020). Slootman’s stated focus on investor relationships rather than ensuring that every last dollar was squeezed out of Snowflake’s IPO may reflect a more mature approach to going public, acknowledging the current insatiability of demand for public companies. There may have been no price at which Snowflake would not have “popped,” but there was probably a price at which crucial institutional investors would not have participated.
Regardless of Snowflake’s perhaps genius, perhaps idiotic pre-public tactical moves, its stock has certainly seen better days. In March of this year, Snowflake’s share price tumbled to half of its peak value (Munarriz 2021). The company still maintains highly impressive growth metrics, but the recent drop in share price could be an indication of waning hype for the stock since its market debut (Team Trefis 2021). Wall Street seems to be maintaining its optimism about this frosty cloud-computing based data warehousing company. Analysts continue to support Snowflake through its stock price fluctuations, citing the flexibility and dynamism of the company in serving business needs both small and large (Baccardax 2021).
Snowflake’s ability to remain competitive against massive tech companies who attempt to poach clients will determine its future success. As evidenced by their composure navigating a hectic IPO market, Snowflake’s management certainly has an ability to keep an eye to the future, but the greatest challenges may occur in the present, amidst the jockeying for market share in the rapidly growing data warehousing industry. The year will certainly bring forth a variety of changes, most notably the loosening of restrictions, which may provide either an opportunity or a challenge for Snowflake going forward.
Sources
Baccardax, Martin. 2021. “Snowflake Jumps as Evercore ISI Starts Coverage With Outperform Rating.” TheStreet. https://www.thestreet.com/investing/snowflake-shares-jump-on-311-price-target-from-evercore-isi.
Konrad, Alex. 2020. “Snowflake CEO Frank Slootman Talks IPO Pop: Narrative Of Lost Billions Is 'Nonsense Talk."” Forbes. https://www.forbes.com/sites/alexkonrad/2020/09/17/snowflake-ceo-frank-slootman-talks-ipo-pop-narrative-of-lost-billions-is-nonsense-talk/?sh=106c1dc97d1d.
Kraynak, Joe, and David Baum. 2020. Cloud Data Warehousing for dummies. Hoboken, NJ: John Wiley & Sons, Inc.
Mackintosh, Phil. 2021. “Trends in IPO Pops.” Nasdaq. www.nasdaq.com/articles/trends-in-ipo-pops-2021-03-04.
Munarriz, Rick. 2021. “3 Once-Hot IPOs That have Fallen by 40%.” The Motley Fool. www.fool.com/investing/2021/03/24/3-once-hot-ipos-that-have-fallen-by-40/.
Owens, Jeremy C. 2020. “Snowflake IPO: 5 Things to Know about the Berkshire-Backed Company after It's Record Software Offering.” MarketWatch. www.marketwatch.com/story/snowflake-ipo-five-things-to-know-about-the-berkshire-backed-company-as-it-heads-for-record-software-offering-11600182459.
Team Trefis. 2021. “Snowflake Stock Down 45% From HIghs, Time To Buy?” Forbes. www.forbes.com/sites/greatspeculations/2021/03/25/snowflake-stock-down-45-from-highs-time-to-buy/?sh=5e4c0e113476.