The risks of Snowflake’s IPO

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Last valued at $12.4 billion in private funding, cloud software company Snowflake reached a $33.3 billion valuation after pricing its initial public offering late Tuesday.

Flexing the massive investor demand in the data warehousing company, Snowflake sold 28 million shares priced above range, at $120 apiece, raising nearly $3.4 billion. The pricing implied that the company held a market value above that of Twitter ($31 billion) and Airbnb (reportedly last valued at $18 billion). 

It’s not hard to see why investors are enamored: Snowflake is an enterprise tech company operating at a time when work-from-home has become the norm, in a sector that has stood staunch against the coronavirus and even experienced a boost. 

It also operates in one of the buzziest of buzzes in tech: the cloud. In that space, it’s considered the younger, more agile competitor, with the potential to capture more of the market as data warehouses shift to cloud. Meanwhile, Oracle, which has long dominated the warehouse space, is expected to move more slowly in its transformation, per my colleague Aaron Pressman.

Snowflake nearly tripled revenue in the year ending Jan. 31, pushing the figure to $264.7 million in 2020, and appears on track to double that figure again this year. 

Despite its massive growth, Snowflake is not without its sore points. Even as it competes with the likes of Amazon, Google, and Microsoft, the company is still dependent on infrastructure from, yes, Amazon, Google, and Microsoft. That puts Snowflake at risk if prices there rise—and if those same cloud providers decide to embed certain interoperating privileges that encourage customers to use, say, Amazon over Snowflake (which echoes, at least for me, antirrust criticism Apple is currently facing over the bundling of its products). The company acknowledged as much in its IPO filing:

“Our platform currently operates on public cloud infrastructure provided by Amazon Web Services, Microsoft Azure, and Google Cloud Platform,” the filing read. “Our costs and gross margins are significantly influenced by the prices we are able to negotiate with these public cloud providers, which in certain cases are also our competitors… 

“There is risk that one or more of these public cloud providers could use their respective control of their public clouds to embed innovations or privileged interoperating capabilities in competing products.”

Snowflake is set to debut on the NYSE as “SNOW.”

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Lucinda Shen
Twitter: @shenlucinda
Email: [email protected]