ties of snowflake to Amazon are a big risk as investors prepare for IPO

On Wednesday stock market debut of snowflake has generated buzz on Wall Street because investors almost never see a company with close to $500 million in annualized revenue that’s still doubling every year.

Yet one of Snowflake’s biggest growth catalysts is also among its greatest risks. Snowflake sells a database in the cloud that primarily relies on infrastructure from Amazon Web Services and has committed to spending $1.2 billion on technology from AWS over five years.

At the same time, AWS is making heavy engineering and promotional investments in its own competitor, Redshift. To lessen its reliance on AWS, Snowflake is also using cloud services from Microsoft and Google. But AWS is still, by far, Snowflake’s biggest vendor. That could concern investors who have seen Amazon use pricing power in its dominant consumer and enterprise businesses to drive out competition.

“The relationships with the public cloud companies is one of frequent inquiry,” Snowflake CEO Frank Slootman said in his videotaped presentation for investors. “We are becoming large customers and consumers of public cloud capacity, as well as partners and competitors, all at once. It can be frustrating, sometimes even bewildering, from one day to the next. But we are now trending better with all three.”

Investors are excited about the growth the company has demonstrated recently under Slootman, who joined in May 2019 and previously ran ServiceNow. Berkshire Hathaway and Salesforce are buying shares as part of the IPO, and on Tuesday Snowflake priced shares at $120, higher than the $100 to $110 range it estimated on Monday, and way up from the $75 to $85 range it proposed in a filing last week.

At $120 per share, Snowflake would be debut at a valuation of $33.3 billion. Companies ranging from Capital One and McKesson to Adobe and DoorDash use Snowflake’s data storage and analysis tools on top of cloud infrastructure. Since its founding, Snowflake has worked exclusively on public cloud services, giving customers the ability to quickly access data from anywhere, share data easily and add or subtract capacity as needed.

Through Snowflake’s website, employees at companies, universities and government agencies store and run queries on a variety of data, which can then be charted using visualization tools such as Salesforce-owned Tableau. In July, according to Snowflake’s IPO prospectus, people ran an average of 507 million queries per day in the software, up from 254 million a year earlier. As a result, Snowflake is increasing its consumption of storage and computing services from major cloud vendors.

The deal with AWS is particularly hefty. In the contract’s first year, which ends in July, Snowflake is required to spend $115 million on cloud infrastructure, a number that climbs to $350 million by 2025. To bolster its gross margin, or the percentage of revenue left after subtracting the cost of goods sold, Snowflake’s sales have to grow faster than its cloud costs.

In addition to its Amazon contract, Snowflake has an agreement with a different unnamed cloud provider to spend at least $550 million over 64 months, which works out to $103 million per year. Slootman said in the investor presentation that Microsoft is “our second biggest and also our fastest-growing platform.”

In its prospectus, Snowflake said the “cost of product revenue” accounted for 94% of its total cost of sales. Much of that is going to Amazon. “Cost of product revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with our customers’ use of our platform and the deployment and maintenance of our platform on public clouds,” the filing says.

Snowflake’s bottom line is moving in the right direction. Revenue surged 121% in the second quarter from a year earlier to $133 million, and its gross margin increased to 62% from 53%. Net loss in the quarter narrowed to $77.6 million from $93.4 million.

ties of snowflake to Amazon are a big risk as investors prepare for IPO via @MasterMindUpdate
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