Wall Street’s Love Affair With Snowflake And Cloud Computing Creates Biggest Software IPO In History

In the biggest initial public offering of the year and the largest IPO ever for a software company, Snowflake (SNOW) raised $3.36 billion in its debut on Wednesday.

Priced at $120 per share in the offering, Snowflake shares closed at $253.93 on Wednesday, granting the data warehousing company a market cap of more than $70 billion – larger than Goldman Sachs (GS).

Cloud-computing stocks have flourished in a year when the COVIS-19 pandemic has forced millions to work from home.

“Cloud has gone from a proof of concept or for things that were less critical to companies realizing it will enable a much more agile and modern architecture and working style," Daniel Elman, an analyst at Nucleus Research, said according to Bloomberg.

“We have already seen [cloud stocks] Zoom (ZM), DocuSign (DOCU) and Datadog (DDOG) do well this year,” Bloomberg Intelligence analyst Mandeep Singh said. “Investors understand the cloud business model well and that makes a high-growth company like Snowflake attractive.”

Among the winners from the huge IPO was the Seattle-based firm Madrona Venture Group, which first invested in Snowflake three years ago.

“Sometimes you find a team and a technology that is just poised to take off,” Madrona Managing Director S. Somasegar said according to Geekwire.

Former Snowflake CEO Bob Muglia – an ex- colleague of Somasegar at Microsoft (MSFT) – owns 4 million Snowflake shares, or about a 1.7% stake, after selling half of his holdings to Warren Buffett’s Berkshire Hathaway (BRK-A) in the IPO.

Singh of Bloomberg commented that Berkshire’s participation “definitely validates the attractiveness of Snowflake’s IPO.”

Four of Snowflake’s top executives, CEO Frank Slootman, Muglia, Chief Financial Officer Michael Scarpelli and Co-founder Benoit Dageville, now own stakes valued at $8 billion.

Iconiq Capital, a private investment firm, started investing in Snowflake in 2017. Its 12% stake in the company is now valued at $8.6 billion.

Another major beneficiary of Snowflake’s IPO was early investor Sutter Hill Ventures, which owns more than 20% of the company – a stake valued at $12.6 billion.

Based in San Mateo, Calif., Snowflake posted revenue of $242 million in the first half of 2020.

Aaron Levie, CEO of enterprise cloud company Box, said in a tweet that Snowflake’s IPO is “showing that markets for enterprise software continue to be far larger than most anticipate. With exponential growth in data, devices, and apps, something already big today might be 100 [times] bigger in just a few years.”

Harri Thomas, a startup expert, tweeted: “What's not to like about enterprise software? Clients budgets are massive, and procurement is such a pain for them that contracts are only ever revisited every 12-24 months, if that. You could be a massive enterprise business with [only five] customers.”

However, Slootman was somewhat subdued about his company’s successful IPO.

“So far, so good,” Slootman told Bloomberg. “We needed to do this [IPO] for a number of reasons, especially to raise the stature of the company in the marketplace. We sell to the largest companies in the world and we also compete with the largest companies in the world, so it’s really important. ... Just staying on this growth trajectory takes one hell of an effort.”

Regarding Snowflake’s suddenly lofty valuation, Slootman told CNBC: “A stock is worth exactly what somebody wants to pay for it. It’s like talking about the weather, it is what it is. Tomorrow’s another day, we’ll see what it brings.”