If you aren’t familiar with the term “unicorn”, now is a great time to learn it. In capital markets, a unicorn refers to a privately held start-up that has a valuation of at least $1B; aptly named because the chances of a company reaching this stage are about as close to zero as your chances are of finding a unicorn in the wild.
Snowflake, a US-based cloud computing company, achieved unicorn status in 2018 when they received private investment from a handful of Silicon Valley venture capital firms at a valuation above one billion dollars. At that time, they noted that their goal would be to pursue an IPO within 2 or 3 years… and here we are two and a half years, one pandemic, and a roller coaster of a stock market later, watching a massive IPO that climbed 112% on day one.
In order to understand why this happened and see if they have a place in your portfolio, we have to dig a little bit deeper into Snowflake, see who’s behind the company, and understand where this valuation is coming from.
1. What Does Snowflake Do as a Company?
Besides their newly earned title of the biggest software IPO of all time, Snowflake can be understood as a Silicon-Valley based cloud computing company, dealing with data storage and analytics. For a bit of background, giants like Amazon Web Services (AWS) and Microsoft’s Azure create and control the cloud infrastructure – but companies like Snowflake use that infrastructure to interpret data and sell it to organizations. Think of it this way: if AWS and Azure are creating cities for your data to live in, Snowflake provides the map and directions to get where you want to go.
Lately, cloud computing is a hot topic in the Valley as investors understand the concept and see the massive scalability that comes with the space. Once the core business is in place, companies like Snowflake have basically unlimited room to grow and, since its inception, Snowflake has been growing fast.
2. Who’s Behind the Company?
Snowflake’s executive management is composed of names such as company founder Benoit Dageville, former Microsoft executive Bob Muglia, venture capital veteran Frank Slootman, and CFO Michael Scarpelli. Altogether, this team brings together a massive amount of experience from the worlds of tech, finance, and capital markets, along with all their connections from these areas.
A public company, however, is much more than just the management team. The company has investors and advisors from some of the biggest and most notable organizations in the US including Mark Zuckerburg from Facebook, Reid Hoffman from LinkedIn, Jack Dorsey from Twitter, and of course, the legendary Warren Buffett himself. Any one of these names would cause interest to pique from retail investors; when they’re all on the same team about an investment, it’s easy to get excited.
3. High-Growth Company Valuations
When you’re looking at a growth company, you’re pegging the valuation based on the potential of the company, rather than their track record and financial fundamentals; look at some of the high-growth giants currently dominating the stock market: Tesla, Beyond Meat, Zoom Communications, etc. These companies all have valuations that are insane by standard financial methods, yet there’s usually no perfect way to quantitatively evaluate them.
With a high-growth company – especially in tech – previous earnings reports often become irrelevant as soon as they’re released, as revenues are growing in double-digit percentages within months rather than years. Now, this isn’t to say that all growth companies are deserving of valuations 40-50x their earnings… in fact, most companies can’t possibly live up to the expectations that investors have of them and will experience massive fluctuations as public sentiment sours and brightens up again.
If you’re a scout for the NHL, you’re going to be basing your decisions on the potential that you see in young athletes because you just don’t have the time to sit and wait for season-over-season performance. Now, are you going to make perfect decisions 100% of the time? Of course not! But who knows, for every 100 rookies you bring into the league, you could find one Wayne Gretzky.