A few days ago, I had a post on Snowflake “What company is Snowflake owned by Buffett? Where is its value?” In addition to Berkshire, Snowflake also has a heavyweight shareholder, which is Salesforce, the ancestor of cloud computing. Interested friends can refer to my previous article “How does Salesforce make money? Why is it so successful?” Why is it so successful? “.
I mentioned the company Snowflake (ticker: SNOW) in 1-3 and 6-6 of my new book “The Rules of 10 Baggers《十倍股法則》“.
Software industry trend in past 2 decads
I’ve said this over and over again in many places, there have been too many free Open Sources in the last 20 years. But unlike 20 or 30 years ago, the current open system is not only powerful, but also free, which has completely changed the software industry for nearly 20 years. The most important shift in this trend started 20 years ago with the Linux operating system. The emergence of the Linux operating system changed the entire software industry; it even made Microsoft panic, and now 3/4 of the world’s people have mobile phones are unning with Android which is based on the Linux operating system.
Many software are born out of open systems
The most important thing in an open system is the database and the operating system. They are the largest and most critical of the open system. This has a great impact. In fact, many newly listed software vendors and unicorns have rewritten or strengthened their open systems. They have grown into such a large scale only after gaining market revenue. There are many examples, so I will not give them one by one. We will discuss it in detail in the future when we have the opportunity.
Database is the base of large software system
Database changed a lot
All large software needs to use the database. Twenty years ago, databases were the software industry’s most lucrative and most influential software area. That’s how Oracle came about.
The introduction of the free operating system Linux 20 years ago changed all that. Because all hardware platforms can execute Linux, and Linux also comes with many free database systems!
However, it has been impossible for the software industry to make money on the database itself for nearly 20 years. Because now the database engine and most of the use are free, even if the large database of Oracle and Microsoft, only installation and use are free of money. The database vendors can only rely on service support to make money, or can rely on other modules and functions on the database. This is the biggest change in the database industry in the past 20 years.
Cloud and mobile trend
I mentioned in my books “The Rules of 10 Baggers《十倍股法則》” and “The Rules of Super Growth Stocks Investing《超級成長股投資法則》“, In the past decade or so, the biggest change in the software world has been cloudification and mobility. As for the database part, The database, on the other hand, uses memory directly to speed up processing, getting rid of a major flaw that has plagued it for a long time. The representative business is MongoDB (ticker: MDB).
For MongoDB, according to db-engines.com/en/ranking, it is currently ranked about fifth, but it has been a long time since the fifth place. The top three MongoDBs are unlikely to beat. Now that cloud computing comes out, this trend has worsened, which is also the main reason why Oracle’s stock price has lagged behind for a long time (Oracle has nearly two The cloud has gradually improved in recent years, which is also reflected in its share price, but there is still a long way to go. I mean compared with AWS and Azure, because Oracle is a large enterprise, and it needs to break through to make a difference in the share price. obvious help). The stock price of MongoDB has not performed much in the past two or three years (compared to it five years ago), probably because since it launched Atlas, no major solutions have been launched.
The new way of data processing
Confluent (ticker: CFLT) is another type of modern database, which is widely used in the current generation of Silicon Valley and the new generation of software development, because it eliminates the need for programmers to deal with this complex process by themselves. Save a lot of work, that’s what it’s worth, and why it can go public.
But Snowflake is different from the above. As far as I know, the only one that is closest to Snowflake is databricks (not yet listed), but in terms of popularity, and from what I know, Snowflake is still relatively larger than databricks.
Why Snowflake is popular?
Snowflake is popular, as my previous post”What company is Snowflake owned by Buffett? Where is its value?” for some reasons mentioned, because it combines mobile computing, cloud computing, data warehousing, data analysis, and database (it is also considered a certain form of database, or it is more appropriate to say that it is a contemporary database).
Where is the moats?
As for the moat, to be honest (don’t mind everyone, but it’s important, I want to be honest), Snowflake has, but not very wide, strong enough to have no rivals or others are far from him, and the reason is as follows:
Too many enemies
Snowflake has too many rivals, because as long as it is a database, cloud platform operators are its existing competitors; the point is that these competitors are behemoths that are not easy to mess with.
Amazon AWS, Microsoft Azure, Alphabet GCP, Oracle OCI, as far as I know, are all partners and competitors with Snowflake. They need each other for many reasons.
For example, about 85% of Snowflake’s revenue comes from data analytics modules deployed on Amazon Web Services; but AWS’ Redshift is one of Snowflake’s biggest competitors.
Snowflake’s existing scale and customers are still far from these behemoths , because all big enterprise are their customers and have inherent advantages. The disadvantage Snowflake needs to face is that database and data processing is a scale-winning industry, focusing on large enterprises, and large enterprises are all already customers of Amazon AWS, Microsoft Azure, Alphabet GCP, Oracle OCI. Snowflake has a lot works to do.
Snowfake’s competitive advantages
If you listen to my opinions above, most people will think that Snowflake has no fun, right? Not really, it still has some competitive advantages.
Because Amazon AWS, Microsoft Azure, Alphabet GCP, Oracle OCI are platform providers, which is good or bad for them; because they operate cloud platform business and also sell software, including database, data warehousing, data analysis, etc. But Snowflake is now like TSMC, only doing foundry and not competing with customers.
Snowflake is focused on data processing, business-specific, and focused, such as my post “What company is Snowflake owned by Buffett? Where is its value?” What I mentioned in the first paragraph of the post, all enterprises need data processing, and the trend will increase over time, because of the internet, the emergence of mobile phones, Web2.0, and a large amount of data generated by live streaming. What is going on now is the huge amount of data generated by various sensors. In the case of electric vehicles, the data that self-driving cars need to process per second is measured in gigabytes, and with the improvement of technology and resolution, it will become larger and larger. Coupled with 5G and Industrialization 4.0, there will be an astronomical sea of data in the future!
No legacy burden
Snowflake is a new generation of software startup, and there is no legacy burden (including technical, compatibility, and image aspects). Unlike traditional local data management systems, Snowflake’s platform is built natively for cloud computing. It provides 100% software on the internet.
Snowflake customers can use the company’s data warehouse to share data with their partners across multiple online storage systems. Snowflake can also share easily searchable material between apps.
Moreover, the difference between Snowflake and the traditional database system vendor architecture is that it completely separates data storage and calculation. This brand-new approach has changed the entire database ecology, and has also completely accelerated the processing, analysis, and calculation of the database.
Snowflake’s data analysis tools have been available on Amazon’s AWS in 2015, Microsoft’s Azure in 2018, and Google’s GCP platform in 2020. In June 2021, Snowflake and C3.ai (ticker: AI) reached a cooperation as well. The two companies will collaborate to provide companies with artificial intelligence tools.
Business is in highly growth mode
Snowflake is still small in scale (in fact, it is not small, but here I compare it with Amazon AWS, Microsoft Azure, Alphabet GCP, Oracle OCI), and there is a lot of room for growth. Since its launch, as far as I can remember, the growth rate almost every quarter has been above 60%, which is a very scary achievement.
Snowflake’s Financial Disadvantage
Newly listed companies or unicorns are at a great financial disadvantage, and Snowflake is no exception. Especially in the current bear market, investors will use a magnifying glass to examine.
Everything looks good on the surface
Investors who are familiar with American growth stocks, if you carefully read this article and my previous article “How does Salesforce make money? Why is it so successful?” At first glance, I must say that under the bear market that has lasted for a year so far, still had such super high revenue growth was not easy. The third quarter of 2022 still has a super high revenue growth rate of 66%, even if this achievement was during the big bull market, it is considered extremely prominent.
The product seems to be very competitive, and the customer has also seen substantial growth. It seems to be a shining software star with no shortcomings.
If it is in the big bull market before 2021, such achievements, compared with peers, will indeed be eye-catching among technology stocks, and it is not easy for people to ignore them. But the truth may not be quite as many people think.
Finances have not improved
In the third quarter of 2022, the stock based compensation for employees will be as high as 45% of the revenue! This is an extremely high number. Not only that, every quarter in the past year has been higher than this figure, and the fourth quarter of 2021 is as high as 75%. And it is expected that the figures for each quarter of the next year will be similar to this. This obviously erodes the rights and interests of investors and arouses criticism from professionals.
Operating profit for 2021 is a loss of $715 million.
2021 free cash flow was 0.19 per share. However, in practice, if the employee’s dividends and allotment expenses are included, the free cash flow per share will become negative 0.47. The point is that this number of the company has been negative in the past, and it is impossible to improve in the next year.
Significant decline in growth rate
Another very objective figure is that until the third quarter of 2022, it was the fourth consecutive quarter of declining growth. Of course, it is a bear market now, and investors will be particularly picky. But even so, it will still deter investors. The revenue growth rate in the third quarter of 2022 was 66%, which is very impressive; but a year ago, the revenue growth rate in the third quarter of 2021 was 94%!
As what I addressed in my post “What company is Snowflake owned by Buffett? Where is its value?“, there are many competitors, but two are notable.
Databricks is on the rise. The most recent funding round valued Databricks at $28 billion (Snowflake’s current market cap is $60 billion). Databricks, which uses artificial intelligence, is expected to go public soon.
Hewlett Packard Enterprise (ticker: HPE), which owns the GreenLake platform, is another competitor. HPE’s advantage is that it is a large system provider like IBM. Its main business is the enterprise software, hardware, and servers used by enterprise customers, and it also integrates system projects.
In a recent investor meeting, Snowflake updated its addressable market (TAM). TAM will reach $248 billion by 2027, up from an estimated $90 billion last year.
Long term outlook
The company estimates that the annual product revenue in 2029 will reach 10 billion US dollars, and the company’s product annual revenue this year is estimated to be 1.9 billion US dollars.
That is, the current penetration rate is less than 4%, and there is still a lot of room for growth.
The company said it expects free cash flow margins to increase from 15% to 25% in 2029.
The favorable license model
Because Snowflake’s business model is based on actual consumption pricing (related to the amount of data its customers process and store), that is, how much is paid for how much is used, rather than a prepaid subscription system. This unique business model is one of the very important reasons why it has been able to capture a large number of customers so far.
This new business model of consumption-based pricing charges software customers based on how much they use a product, rather than a recurring annual or multi-year subscription fee. The model popularized by Snowflake is being adopted by a growing number of software makers, including C3.ai (ticker:AI) and Autodesk (ticker:ADSK).
It’s hard for customers to say no because they don’t have to spend to buy out or subscribe for a fixed period upfront.
But there are also risks. In the current environment where the economy is significantly slowing down, if the business situation deteriorates again, it may cause customers to shrink their hands. That’s the main reason why some on Wall Street are worried that a U.S. recession could dampen demand.
It may also be one of the main factors behind its slower growth in the second quarter of 2022 compared to previous quarters. But remind you, the quarterly growth rate of Snowflake is already a very bright performance compared with its peers or other listed companies, especially in the current economic environment.
Performance since IPO
Q2 2022 performance
The performance for the second quarter of 2022 is as follows:
- Revenue increased 83% year over year to $497.2 million, with product revenue increasing 83% to $466.3 million; revenue for the first two quarters increased 85% and 101%, respectively.
- GAAP lost 70 cents per share, compared with a loss of 64 cents a share a year ago.
- There are 246 customers with product revenue of more than $1 million in the past 12 months.
Share price return
Listed in September 2020, it is the largest software IPO in the history of the US stock market. On share price part:
- Shares of the company are down 45% so far in 2022.
- The iShares Expanded Tech-Software ETF (IGV), a major software ETF, is down 33% so far in 2022.
- The S&P 500 is down 19% so far this year.
The NRR (net revenue retention) has remained above 170% in recent quarters, the best performance of any SaaS business I’ve personally seen.
Only 543 of the Global 2000 (the 2,000 largest companies worldwide) are Snowflake customers. It still has big room to grow for Snowflake.
- “Deep dive on Snowflake’s competitiveness“
- “How does Salesforce make money? Why is it so successful?“
- “Microsoft, the dominant overlord of cloud computing“
- “What company is Snowflake owned by Buffett? Where is its value?“
- “Veeva, the king of industry systems in the lifescience industry“
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.