• Brett Schafer

Not So Deep Dive: Snowflake Stock



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Show Notes


(Ryan) What they do: (Spent all morning watching product demos, so I’m officially an expert). Snowflake is a relational database that has been purpose-built for the cloud. A relational database is just a type of database that stores and provides access to data points that are related to one another.


I’m gonna steal a quote here from hhhypergrowth.com “Companies have to measure and track everything: data from sales, data from marketing campaigns, data from the supply chain, data from customers, data from partners, data from finance, data from infrastructure, data from software teams, and data from every SaaS application & service that their business is built upon. These tend to be collected in separate data silos, where each team within an organization is keeping and accessing the data that pertains to them.”


Snowflake is a platform that enables organizations to break down these data silos and extract insights from them in a secure way. So I’m gonna try to verbally take the listeners through a use case (I’m repeating the same one that Snowflake has up on their youtube page). And there are more unique intricacies to the platform, but it would take too long to talk through all of them.


Let’s say you’re working on the analytics team at CityBike in New York and you’ve got a spreadsheet with the rides from the last 12 months, including name, day, time, ride duration, etc. If you wanted to share this information with the rest of the team, on snowflake, you could create a data warehouse and upload the file. From there, Snowflake has tools to make that data more useful. (In technical terms this is called automated indexing and partitioning). Now let’s say another member of the analytics teams logs into snowflake to look deeper at the dataset that was just uploaded. That person sorts for the days with the lowest rides and sees that they’re all in Feb. They suspect that has to do with the weather so they ask their team member to collect some weather data. The team member is able to find some world weather data and uploads it to the previously created warehouse that the rest of the team can access. The team goes in and filters that data specifically to NYC. They can combine the weather data with the ride data, and they find that the shortest ride durations were on the days with snow and the days in February were snowing. This is now a useful insight the company can use to make decisions.


How they make money? Snowflake charges on a consumption-based model. So in that example we just used, Snowflake charges for storing the data in that data warehouse, which can automatically be turned off or on, but you also have to pay for access to Snowflake.


(Ryan) History: In 2012, 3 data warehouse experts named Benoit Dageville, Thierry Cruanes, and Marcin Zukowski came together in San Mateo, CA and began working on what is today Snowflake. Dageville and Cruanes previously worked at Oracle together, and Zukowski was the founder of another database management system called VectorWise. By 2014, the company came out of stealth mode and had 80 organizations using the system at the time. They raised VC money fairly easily it appears. The founders brought in an ex-Microsoft executive to run the company as CEO. By early 2018, (less than 4 years), they raised $263M at a $1.5B valuation with several other follow-on rounds. In 2019, both the ex-CEO and CFO of ServiceNow (Frank Slootman and Michael Scarpelli) joined the company and a year later the company went public.


(Brett) Industry/Landscape/Competition:

  • Data Lake market size is $7.6 billion in 2019 (estimated) and is expected to grow at 20% CAGR through 2027

  • Data Warehousing market estimated at $21 billion in 2019 and expected to reach $50 billion this decade

  • They believe they have a $90 billion TAM

  • Big takeaway: these industries are growing rapdily

  • Competitors: The big 3 IaaS providers, IBM, Oracle, MongoDB, Databricks, plus a lot of smaller ones and open source projects


(Brad) Management and Ownership:

  • CEO is Frank Slootman

  • Former Chairman CEO or ServiceNow for 6 years

  • President and CEO of Data Domain which grew to its IPO in 2007 and was thereafter acquired by EMC in a bidding war

  • 94% Glassdoor rating

  • Frequently showered with workplace accolades and really a top notch leader from all the interview I’ve listened to him speak on

  • Co-founder and president of products is Benoit Dageville

  • Was a database architect at Oracle for 16 years

  • CFO is Michael Scarpelli

  • CFO of ServiceNow while Slootman was there

  • Former Nutanix board member

  • Former PricewaterhouseCoopers partner

Ownership

  • Frank owns 4.9% with Dageville owning 2.7%

  • All directors and officers own 11.3%

  • Altimeter owns 11.1%, Sequoia owns 7%, ICONIQ owns 11.2%



(Brett) Valuation:

  • Market cap $66.7 billion, ticker SNOW

  • EV of $61.6 (high cash balance)

  • EV/GP of 81 best metric for tracking multiple right now

  • Looking at stock options, you might want to factor in 5% annual dilution


(Ryan) Earnings:

  • For the FY, 2022 they had $1.1B in revenue up 106% YoY

  • 70% gross margin

  • But they had $2.6B in remaining performance obligation, which also grew 99% YoY

  • Their FCF margin was about 12%

  • As of the last quarter, Snowflake had 5,944 total customers and roughly 50% of the fortune 500 use them. Total customer count only grew 44% from a year ago.

  • But the DBNRR was 178% (maybe the most impressive figure I’ve ever seen)


(Brad) Balance sheet and liquidity – fortress balance sheet

  • No debt or interest expense.

  • $3.8 billion in cash, equivalents and short term investments and another $500 million in net receivables.

  • FCF positive but $680M net loss with $600M in SBC helping a lot

  • More SBC dilution coming with share count set to grow by around 10% this year


Anecdotal Evidence:

  • Brad: I got nothing.

  • Ryan:

  • Brett: none.


Future growth opportunities:

  • (Ryan)

  • (Brett) Moving up from the Lakehouse to the analytics and visualization side of things. This could be a bit messy if they start competing with partners but it is the next logistical step in driving growth from existing customers. They’ve explicitly mentioned it.

  • (Brad) Thank you Google Cloud. Taking market share, make multi-tenant and data silos all the more common with a 3rd prominent public cloud player surfacing.


Highlights and lowlights:

  • (Ryan) Highlights: How crucial this is to the companies that use it. The increasing spend from existing customers is an insane figure. The economics are really good, and the platform is really comprehensive. Lowlights: This feels like a company that prioritizes paying management and employees over rewarding shareholders. Idk where it’s at now, but with the 2019 options package, Frank Slootman was making about $95M a month, which was roughly equal to the entire company’s revenue.

  • (Brett) Highlights: Seems to have the best built service for cloud needs, fast moving leadership team with strong track record, great unit economics and work capital advantage, and huge RPO that keeps growing. Lowlights: Feels like it would be tough to move into smaller businesses, even medium-sized ones, extremely heavy SBC. Is management a couple of mercenaries?

  • (Brad) Management’s track record and success with ServiceNow is something I find very compelling (SBC makes it slightly less so) but Slootman is highly regarded within his industry. Lowlight is ample and strengthening competition. Valuation made it seem like a monopoly but Data Bricks is rapidly growing with other players like Redshift and Athena also vying for market share


Bull Case:

  • (Ryan) Obviously, this is a hell of a business. I think there is certainly a path to $10B in revenue or more in the next 5-7 years. If they can generate 20-30% FCF margins and the executive compensation plan changes, this could provide ok returns. Let’s assume it trades at 40x FCF on $3B in FCF, you’ve got a $120B market cap. That’s almost a double from here.

  • (Brett) What is the path to $10 billion in revenue in five years with strong operating/cash flow margins? If you can answer that question I think there is a bull case at these prices.

  • (Brad) This has to be an objectively better product than all other data lake services out there. That is the only way we will get the kind of compounding needed for this to make any sense at all.


Bear Case:

  • (Ryan) There has been and there will be multiple compression. How much? Idk. I have no way to know what the cash flow on the business is going to look like. Also, if they outdo the last options package this time around, that money is not gonna be going to shareholders.

  • (Brett) Valuation, plain and simple. And the valuation will be a factor if either limiting TAM or competition starts slowing down sales growth and/or ruins the unit economics.

  • (Brad) Data Bricks and others are able to closely mirror Snow’s value proposition



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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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