Snowflake can melt before your eyes (NYSE: SNOW)

Snowflake (SNOW) shares were in high demand when it went public on the New York Stock Exchange on 09/16/2020, but that does not mean a potential long-term investor should be caught in the hype. In fact, looking ahead, this stock could see its share price drop significantly.

It appears that Snowflake’s market capitalization may more than double on the first day of trading. The IPO price was set at $ 120 per share with a market capitalization of $ 33 billion, opening at $ 245 per share with a market capitalization of over $ 70 billion. At the end of the market on 09/18/2020, the stock had pulled back to $ 240 per share with a market capitalization of $ 66.4 billion; There is considerable enthusiasm for Snowflake.

Warren Buffett

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

In addition, Omaha’s Oracle also seemed to expand such enthusiasm – Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) and Salesforce (CRM) on 09/08/2020 each for $ 250 Million agreed stock IPO. Berkshire acquired more than four million shares from an existing shareholder on the same day.

The investment has paid off for Buffett, who has long been reputed to be wary of IPOs and tech stocks – Buffett earned $ 800 million on day one (given the amount invested, it’s likely that Buffett K Lieutenant – Todd Coombs and Ted Weschler – himself instead of the trigger Buffett for the pull).

So, what is it about Snowflake that instills such confidence? Broadly, the database management system market in which Snowflake operates is likely to grow to a market size of $ 63 billion by 2022, and database systems have evolved from in-house data centers to computing cloud – significantly expanding data volumes Happening. The data needed a cheap storage facility for the warehouse. And snowflake is one of the pioneers of this development.

Snowflake has many traits that make it competitive in the field. First, customers can add capacity as per their requirement and software licenses are charged for use only instead of a fixed price. Second, its data marketplace has a feature that allows customers to market and monetize their data for Snowflake’s 3,000+ customers.

Third, Snowflake’s multi-cloud service Alphabet (GOOG) (GOOGL), Amazon (AMZN), and Microsoft (MSFT) is running in all three major public clouds, so customers are not limited to one of them . Fourth, and finally, Snowflake not only sells software, but also manages servers, putting it ahead of competitors such as Databricks.

While Snowflake has yet to turn profitable as a result of these competing factors, it appears to have reported so far, with an annual increase of 173% in revenue as a sign of increased revenue.

year Revenue ($) Net Income ($)
2019 Is 96.7 million -178.0 million
2020 264.7 million -348.5 million

The figures collide with the income statement available on Seeking Alpha.

Net income figures suggest difficulty with the path to profitability, but quarterly figures for the current fiscal year show that Snowflake has this problem at hand and its revenue continues to grow.

2021 quarters Revenue ($) Net Income ($)
Q1 Is 108.8 million -93.6 million
Q2 133.1 million -77.6 million
complete 241.9 million -171.2 million

The figures collide with the income statement available on Seeking Alpha.

Despite these positive factors, however, the road ahead may prove to be rocky for snowflakes. The competitive factors that Snowflake brings to the table may not be sufficient to provide an advantage against its rivals, as start-ups such as Altinity can offer cheaper open-source alternatives (such as Altinity’s ClickHouse). More troubling is the fact that larger and better established firms – Alphabet, Amazon, Microsoft – have their own competing products, which are improving all the time (BigQuery, Redshift, and Azure SQL, respectively).

As mentioned above, Snowflake’s service works across all three cloud services, but as companies behind those cloud services consolidate their products, the scope for Snowflake can become more limited – and users There have already been attempts by Amazon and Microsoft to encourage them to choose. For his services on Snowflake. AWS RA3 can be separated from computations, and Microsoft has upgraded its data analytics product. These efforts will go ahead.

In addition, Snowflake will have to contend with rivals who provide more specialized services. To take an example, MongoDB (MDB) can store data from websites in a JSON-like document database instead of just extracting data. The more common offering of snowflakes is thus likely to be overlooked in favor of a host of specialized service providers.

In addition, the fragmented nature of the cloud computing sector means that no company dominates the field, which can provide snowflake scope. However, the larger and better-financed firms mentioned above are more likely to gain market share through mergers and acquisitions, eventually squeezing out other competitors such as Snowflake. As of July 2020, Amazon has a 31% market share, while Microsoft has 20% Azure and Alphabet with 6% Google Cloud.

This makes the notion of investing in Snowflake senseless at this time. The assessment is exceptionally steep, as noted by fellow sealing alpha writers Gary Alexander and Lucas Völgram. The price to sales ratio of 121.11 is higher than 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 make it harder to move forward, the likelihood that it will ever be profitable is unlikely enough to justify this assessment.

In summary, the scope for Snowflake to become the next Oracle (ORCL) in the database management field is offset by the range of competitive threats it faces – particularly from the likes of Alphabet, Amazon and Microsoft. Combined with the fact that Snowflake’s various competitive factors are not long enough to establish a significant advantage over another supplier, it is difficult to justify getting on board here in its current valuation.

Disclosure: I / We do not have a position in any of the stocks mentioned, and have no plans to initiate any of the positions within the next 72 hours. I wrote this article myself, and it expresses my own opinion. I am not getting compensation for this (other than Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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