Why Snowflake's IPO Will Be Red Hot

Jon Markman

Warren Buffet, a legendary value investor, shuns most tech stocks but he’s breaking his rules to take a stake in Snowflake. This is why he likes the fledgling data warehousing company.

Snowflake Inc. (SNOW) makes software to help companies warehouse vast amounts of data in the cloud. Its Data Cloud platform layers storage, processing and cloud services for low latency, simultaneous access.

The technology is disruptive, leading to explosive growth at Snowflake.

Many companies moving their infrastructure to the cloud have a data problem. Often, too many endpoints are trying to access the same information simultaneously, resulting in system sluggishness. Snowflake warehouses all of the data into clusters. When an end user queries the database, the system can grab only the requested cluster. Everything else is ignored, resulting in lower latency.

Speed is a big deal for medium and larger enterprises. The promise of the cloud is the ability to scale up or scale down the amount of resources needed based on need. All of that is great in theory, however if the system is so slow end users get frustrated, the benefits of having a scalable system quickly erode. Consequently, Snowflake has no trouble finding customers.

The promise of the business was great enough to lure Frank Slootman to become chief executive officer in 2019. Previously Slootman oversaw the rapid growth of ServiceNow ((NOW) -Get Report), a cloud-based information technology platform beloved by large and medium-sized companies.

Those customers are also the target market for Snowflake.

According to the S-1 filed with the Securities and Exchange Commission, the average revenue per customer at Snowflake is $111,000. More impressive, based on revenues, the company had a 158% net retention rate for the period ending July 31. In other words, Snowflake is growing sales rapidly with the same large customers. It’s a good sign reflected in the financial statements.

The San Mateo, Calif.-based company had $242 million in sales during the first half of 2020, up 133% year over year. Snowflake also had $887 million in cash and equivalents, versus $674 million in liabilities.

The company cites research from IDC, a global IT research firm, that suggests the total addressable market for Snowflake Data Cloud could be $84 billion by 2023. The current TAM is expected to reach $84 billion by the end of 2020.

It’s the business potential Buffet, chairman at Berkshire Hathaway ((BRK.A) -Get Report) sees. It’s a lot to like.

Berkshire Hathaway and Salesforce ((CRM) -Get Report) are buying a combined $500 million worth of Snowflake shares in a private placement concurrent with the IPO.

It’s rare for Buffet to invest in technology. Known for his folksy Nebraskan charm, Buffet famously avoided investing in the dotcom boom of the late 1990s, admitting he didn’t understand well enough what the companies actually did.

More recently, in 2011, Berkshire took a large position in IBM (IBM) for about $170 per share. The firm closed that position in 2019 for an average price of $145. And in 2018 Berkshire began building a massive position in Apple Inc. ((AAPL) -Get Report) that persists to this day.

Snowflake plans to sell 28 million shares in an IPO next week. Based on the midpoint of the expected price range of $85, shares could bring in gross proceeds of $2.24 billion. That would make the IPO the biggest of 2020. It would also give the company a market capitalization of $24 billion.

Growth investors should consider buying Snowflake shares up to $90.