Home https://server7.kproxy.com/servlet/redirect.srv/sruj/smyrwpoii/p2/ Business https://server7.kproxy.com/servlet/redirect.srv/sruj/smyrwpoii/p2/ Snowflake may melt before your eyes (NYSE: SNOW)

Snowflake may melt before your eyes (NYSE: SNOW)

The demand for shares of Snowflake (SNOW) was high when it became public on the New York Stock Exchange on September 16, 2020, but this does not mean that the future long-term investor should be caught in the excitement. In fact, looking ahead, this stock can see that its share price has melted significantly.

This may seem like an unintuitive approach in light of how Snowflake’s market capitalization more than doubled on the first day of trading. The IPO price was set at $ 120 per share with a market capitalization of $ 33 billion, open at $ 245 per share with a market capitalization of more than $ 70 billion. At the close of the market on September 1

8, 2020, the shares returned to $ 240 per share with a market capitalization of $ 66.4 billion; the considerable enthusiasm for Snowflake is obvious.

Warren Buffett

Warren Buffett’s Berkshire Hathaway made a significant investment in Snowflake – which made a significant profit. Image provided by CNBC.

In addition, a similar enthusiasm seems to extend to Oracle of Omaha – Berkshire Hathaway (BRK.A) (BRK.B) and Salesforce (CRM) of Warren Buffett agreed on August 9, 2020, each to acquire shares worth $ 250 million of an IPO. That same day, Berkshire acquired another four million shares from an existing shareholder.

This investment paid off for Buffett, who has long been thought to be cautious about IPOs and technology stocks – Buffett made $ 800 million on the opening day (given the amount invested, it is likely that Buffett’s lieutenants Todd Combs and Ted Weschler – pulled the trigger, not Buffett himself).

So what is it about Snowflake that gives rise to such confidence? Broadly speaking, the market for database management systems in which Snowflake operates is poised to grow to $ 63 billion by 2022, and database systems have evolved from internal data centers to cloud computing. consequence of a significant increase in volumes the need for a cheap warehouse for storage of these data. And Snowflake is one of the pioneers of this evolution.

The snowflake has a number of features that make it competitive in the sector. First, customers can add capacity when and when they need it, and are charged for use only, instead of charging a fixed price for a software license. Second, its data market has a feature that allows customers to offer and monetize their data to 3,000+ Snowflake customers.

Third, Snowflake’s multi-cloud service works in all three major public clouds offered by Alphabet (GOOG) (GOOGL), Amazon (AMZN) and Microsoft (MSFT), so customers are not limited to any of them. Fourth and finally, Snowflake not only sells software, but also manages the servers, which puts it ahead of competitors like Databricks.

Although Snowflake has not yet become profitable as a result of these competitive factors, it appears to be increasing its revenue, as outlined in the annual revenue it has reported so far, by a 173% annual revenue increase.

Year Revenue ($) Net income ($)
2019 96.7 million -178.0 million
2020 264.7 million -348.5 million

The data is collected from the income statement available in Seeking Alpha.

Net income data suggest difficulties on the road to profitability, but quarterly figures for the current financial year suggest that Snowflake has this problem and that its revenues continue to grow.

2021 Quarter Revenue ($) Net income ($)
Q1 108.8 million -93.6 million
Q2 133.1 million -77.6 million
Total 241.9 million -171.2 million

The data is collected from the income statement available in Seeking Alpha.

Despite these positive factors, however, the road ahead may be shoddy for Snowflake. The competitive factors that Snowflake brings to the table may not be enough to give it an edge over its competitors, as startups like Altinity may offer cheaper open source alternatives (such as Altinity’s ClickHouse). More worrying is the fact that larger and more established companies – Alphabet, Amazon, Microsoft – have their own competing products that are constantly improving (BigQuery, Redshift and Azure SQL, respectively).

As noted above, Snowflake’s service works in all three cloud services, but as companies behind these cloud services strengthen their own products, Snowflake’s scope may become more limited – and there are already attempts by Amazon and Microsoft to promote consumers to choose for their services over Snowflake. AWS RA3 can separate calculations from storage, and Microsoft has upgraded its own data analysis product. These attempts will increase in the future.

In addition, Snowflake will have to fight rivals who offer more specialized services. For example, MongoDB (MDB) can store data collected from websites in JSON-like databases instead of simply retrieving the data. Thus, the more general offer of Snowflake will probably be ignored in favor of many specialized service providers in the future.

In addition, the fragmented nature of the cloud computing sector means that no company dominates the sector, which may seem to give Snowflake reach. However, the larger and better-funded companies listed above are more likely to gain market share through mergers and acquisitions, ultimately pushing out other competitors such as Snowflake. As of July 2020, Amazon holds 31% of the market share, while Microsoft has 20% with Azure and Alphabet has 6% with Google Cloud.

This made the idea of ​​investing in Snowflake at the time unreasonable. The rating is extremely steep, as noted by fellow Seeking Alpha authors Gary Alexander and Lucas Volgram. Its price-to-sales ratio of 121.11 significantly exceeds the sector average of 13.69 and the S&P 500 (SPY) average of 2.50. In light of the competitive environment facing Snowflake, which will only intensify, it is unlikely that it will ever become profitable enough to justify this assessment.

In summary, the scope of Snowflake to become the next Oracle (ORCL) in the database management sector is offset by the range of competitive threats it faces – especially those like Alphabet, Amazon and Microsoft. Combined with the fact that Snowflake’s various competitive factors do not do enough to establish a significant advantage over any other supplier in the long run, it is difficult to justify entering the board here in its current assessment.

Disclosure: I / we do not have positions in any of the mentioned shares and we do not plan to initiate positions within the next 72 hours. I wrote this article myself and it expresses my own opinions. I do not receive compensation for this (except from Seeking Alpha). I have no business relationship with any of the companies whose shares are mentioned in this article.

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