Snowflake corporate headquarters in Silicon Valley, California, February 19, 2020.
Andreistanescu/Dreamstime.comSnowflake arrived in the public market today in breathtaking fashion, instantly becoming one of the stock market’s most expensive stocks, as investors bet heavily on the cloud-based data software company’s ability to maintain what has been astonishing growth.
Snowflake (SNOW) on Tuesday night priced an offering of 28 million shares at $120 each, above the recently increased target range of $100 to $110 a share. Huge demand for the shares has made it difficult for the underwriting group, led by Goldman Sachas and Morgan Stanley, to open the shares. Several hours into the trading day, the stock finally opened at $245, which gave the company a starting valuation of about $68 billion, and already has traded as high as $319, before settling back to around $237 at 1:14 p.m. At the peak, the stock was valued at $88 billion.
That is a remarkable development on multiple levels. Snowflake reported revenue for its January 2020 fiscal year of $264.8 million, up 174% from a year earlier. For the six months ended July 31, the company notched revenue of $249.6 million, up 133%. Let’s assume that the company maintains that growth rate in the second half of the year. That would suggest revenue for the January 2021 fiscal year of about $617 million.
And that would suggest that Snowflake went public with an initial valuation of about 110 times my rough estimate of current year sales. There are not very many companies with valuations that high, once you exclude biotech and medical device companies that are still developing their first products and basically have no revenue, and other special situations like Nikola (NKLA) and Virgin Galactic (SPCE).
Before today, the most expensive software stock was Zoom Video Communications (ZM), which trades for 49 times current year sales estimates. DataDog (DDOG) trades for 48 times, Shopify (SHOP) 43 times, and newly public BigCommerce Holdings (BIGC) 39 times. Also above 30 times: Bill.com (BILL), nCino (NCNO), CrowdStrike (CRWD), Coupa Software (COUP) and Okta (OKTA).
At $68 billion, the stock was worth more than far more established software companies that few would consider especially cheap, like Workday (WDAY) with a $49 billion valuation and DocuSign (DOCU) at $37 billion. Snowflake starts with a market cap right in line with VMware, which this year will have revenues about 19 times what Snowflake is likely to report. The stock is valued at about a third of the market cap of Oracle (ORCL), which this year should have about 70 times as much revenue as Snowflake. Microsoft (MSFT) right now has a market cap of $1.6 trillion, about 10 times current year estimated revenues. Were it valued like Snowflake, it would be worth $17 trillion, more than China’s annual GDP, or about half the current value of the entire U.S. stock market.
In addition to the huge growth rate, the stock is getting a boost from parallel investments in the company by both the Salesforce Ventures arm of Salesforce.com and investment guru Warren Buffett’s Berkshire Hathaway (BRKA). Both agreed to buy $250 million of shares at the IPO price—and Berkshire also agreed to buy another 4.04 million shares from a selling investor. At the IPO price, that’s another $990 million, putting Buffett’s total bet on Snowflake at $1.24 billion.
Meanwhile, this turns out to be a remarkable day for CEO Frank Slootman—his 5.9% stake in the company was worth $3.7 billion at today’s opening price
Keep in mind that while Snowflake, like other cloud software companies, has impressive gross margins—62% for the six months ended July 31 —the company also continues to report mammoth pools of red ink as it spends heavily on sales and marketing, R&D and other expenses. For the six month period, the company lost $171 million.
Write to Eric J. Savitz at eric.savitz@barrons.com
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