In this episode of Industry Focus: Tech, Dylan Lewis and Motley Fool analyst Brian Feroldi discuss one of the most anticipated tech IPOs this year. Learn about executives and culture, their core product that gives them a huge advantage in the space, their financials and a business model which ensures tremendous retention. They also talk about their key competitors and much more.

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This video was recorded on August 28, 2020.

Dylan Lewis: It's Friday, August 28th, and we're talking about a recent tech S-1 filing. I'm your host Dylan Lewis, and I'm joined by's salty sultan of so-so stock searching, Brian Feroldi. Brian, did you pick the S' there, because we're talking Snowflake?

Brian Feroldi: That was completely unfair that you slowed down in the middle of that, Dylan, I want you to go full speed, so I can trip you up one of these times.

Lewis: You will get me at some point. Let me know when your birthday is, and that'll be the week that I intentionally, kind of, put my finger on the scale and maybe trip up on-purpose. I always love the alliteration, it's always a fun way to kick off the show.

Brian, today we are talking about Snowflake, and for anyone that has been watching the tech private markets and those lists that come out every year of most anticipated IPOs, you see it almost every year, this company has been on it. I think this company and Palantir people have been watching for a long time wondering when it's going to happen. We have the prospectus, so presumably it's going to finally happen in 2020.

Feroldi: Yeah. This is one of the S-1s that I was most looking forward to digging into this year. Full disclosure, I had no idea what Snowflake did prior to reading about this. However, I had heard that Tim Beyers is really excited and several other tech focused Fools were really excited about Snowflake and were avid users and promoters of the company. And from what I see here, it seems like Snowflake just raised $0.5 billion in February at a $12.4 billion valuation. So, this is already a very big company.

Lewis: Yes. And that is not their first big raise, they have raised a substantial amount of money in the public markets, I think they're probably at that point where they're getting big, growth is still pretty strong and it's probably a good time for them to hop into the public markets, offer some liquidity and maybe get people a little bit more familiar with the name.

Feroldi: Yeah, that's right. And when I dug into the founding story here, it reminded me a lot of Zoom, Dylan. This is a company that was founded by two former engineers at Oracle, they were talking to their clients, their clients were frustrated by the limitations of data storage. And this was back in 2012, when the two Co-Founders saw an opportunity, left their business, founded Snowflake to help bring data into the cloud, and they've been wildly successful. I love that.

Lewis: Let's talk a little bit about the name, Brian, because it would be easy to look at a tech company and say, Snowflake? Like, what is this, what are we doing here, why are we calling it this? What's the story behind the name?

Feroldi: Snowflakes, Dylan, are born in the cloud. So is this company. You got to like that, right? They're having a fun play on words.

Lewis: Yeah. I think that's fun. I think there was probably a collective groan from some of our audience members, but I like that. That name makes sense and it's a fun story. And really, that's the story with this company, that's the story with the stock, right, is business that was born in the cloud, cloud native, and really helping people make sense of data in the cloud.

Feroldi: Uh-huh. And if you don't like the name, how about this, it's eight years old and it's going to come public at a $20 billion or $30 billion valuation; we still don't know that yet. Or how about this, it's going to be the second-fastest growing SaaS company ever to IPO; or how about this, it's the No. 3 fastest public SaaS company to reach $0.5 billion in annualized revenue. Those are impressive metrics.

Lewis: Those are very impressive metrics. I think, "Or how about this," could be a new recurring segment on Industry Focus. I like the idea of you highlighting some core strength and giving us some things to tee off on as we go through the business. We're going to be talking about who they are, what they do. Data management for the cloud is, kind of, a wonky topic. I know that you spoke with a couple of people at the company who really know this space. Well, Tim Beyers, who's actually one of our lead techs, one of our lead cloud people, as well as some of our more, kind of, behind the weeds or in the weeds tech people as well. So, we're going to be talking about what the business does and then we're also going to be looking at the financials, some of the risks.

This is a fascinating business. They are both partnered with some of the big tech players and also in competition with some of the big tech players. So, there are some interesting dynamics at play here, Brian.

Feroldi: Yeah. And I got to admit, Dylan, I heard about Snowflake, I read through the S-1 and the business description top to bottom and I said, I still don't really know what they do. It's a confusing business to understand if you are not in this world and you're not a Chief Information Officer.

But here's what I understand about this business. They are all about providing businesses with universal access to their data in a secure and cloud-based way. As you teed up, Snowflake actually runs on top of three of the biggest cloud providers in the world. That would be Amazon Web Services, Microsoft Azure, and Google Cloud. [Alphabet] So, Snowflake partners and buys computing and storage space from all three of those businesses and provides a layer on top of that.

Now, my initial question was, why would you go to Snowflake if what they're essentially doing is reselling those services underneath it? And there's a couple of reasons that we'll get into. But, yeah, to your point, they are both buying from and dependent on Amazon, Microsoft and Google, and competing with them. That's interesting.

Lewis: If we're looking for parallels maybe, to make this space a little bit more accessible to people, would it be fair to call them, kind of, like a Roku in the cloud? Where they are giving access to content, they are a hardware player that is competing with big tech companies, but then also, kind of, partnered up in the way that, you know, they're competing with Amazon when it comes to streaming video devices, but they're also making it so that you can watch Amazon Studios content?

Feroldi: Yeah, I think that that's a pretty fair comparison. In essence what Snowflake does is it makes each of those platforms even better and even more usable. And as we'll get into from the numbers here, it's very clear that the market really values this service, because this company has been logging up triple-digit growth for years. And triple-digit customer growth, the amount of customers that are on there. You can't do that unless you're doing something special.

Lewis: No we can't. Why don't we start unpacking some of the terminology we're going to be throwing around here? I think one of the things that will probably come up a couple of times is the idea of the Data Cloud.

Feroldi: Yeah. So, that is their core product here. So, it's "an ecosystem where customers, partners, and data providers can break down data silos from rapidly growing data sets in secured, governed, and compliant ways." Essentially that's a mouthful, but they make it so that companies can upload to Snowflake both structured and semi-structured data and make it universally accessible to all of their employees in a fast and secured and seamless manner. Another benefit that we'll get into is not only can their own employees access this data, but it can actually be seamlessly shared with other Snowflake users. So, this allows data to be shared among organizations seamlessly; that's a key advantage.

Lewis: That is a key advantage. And maybe the easiest way to just think about this is interoperability and being able to easily access and easily use data in different formats across different organizations, simply making it easier and maybe a little bit less friction involved with that process.

Feroldi: Yeah. A lot of companies right now have tremendous amounts of data that is stored on-site, on-premise, Snowflake's software makes it easy for you to take that data and upload it to their cloud. And one thing that Snowflake can do that's unique is they can spread that around Amazon Web Services, Microsoft Azure, and Google Cloud, depending on what the customer wants. That's pretty attractive if you're a Chief Information Officer, because if you go directly to Google or directly to Azure or directly to Amazon, you are, in essence, locking into that one platform. And perhaps that one platform isn't best for a certain geography or for a certain function; by going through Snowflake, you are not locked into any one platform and you can spread your data as need be. That's what I understand is a really key and powerful advantage of this company.

Lewis: I wonder too, if that puts businesses in a position where they maybe have a little bit more negotiating power. You know, these AWS', Azures, and Google Clouds of the world, they have a lot of clout and there aren't too many players there. So, if you're looking for these services, you really only have so many places that you can go shopping, you know, kind of having a middleman that can help connect you to the product that makes the most sense might help you out.

Feroldi: Yep. And it is also -- we'll get into the business model here, but by going through Snowflake, not only does Snowflake have tremendous combined buying power over these three businesses, but their business model is based on usage. So, it's not a subscription that you pay and you pay a flat fee, you pay Snowflake based on how much data you store, how much computing you have and how much cloud servicing you need. So, it's a pay-as-you-go model. Depending on your organization's needs that can actually save you money. So, it's easy to use, it offers you broad diversification, it's wicked fast, you can share data with customers, and you could potentially save money. When you combine that together, I understand the appeal.

Lewis: You made me smile there, Brian, when you said "wicked," I always like to hear that little New England, kind of, seeping out of you. No, but I think that pay-as-you-use and, kind of, use-as-you-go model is very effective and it's a huge selling point for smaller organizations. You know, the idea of having a relatively large upfront commitment or having a monthly fee that you feel like you have to justify can be, kind of, hard. We've seen a lot of businesses be very successful with the pay-as-you-use model.

Feroldi: Yes. And the one that comes to mind immediately is Twilio. And this is something that their CEO and Founder, Jeff Lawson, called out. He said, software, at first, was the licensing model, you pay a fee and then you get access to it for a period of time until you have to upgrade. The second generation was Software-as-a-Service, where you pay a recurring monthly fee for access to it. And he said, the third wave is really the usage model, where you're not necessarily paying to get started on a monthly fee, you're paying for how much you use it. That model is leading to extreme or wicked -- "wicked," Dylan -- net revenue retention rates.

Lewis: Yeah. And it creates a symbiotic relationship between the company and their client, because they are only being used in as much as they are helpful. And I think, you know, if you're kind of taking a pessimistic view of things, if company prospects dip, they're going to look pretty hard at monthly subscription or annual subscription services that they then have to justify, whereas a usage-based model puts them in a spot where they're probably only paying things as they actually incur the activity that's related to that. So, hopefully those are revenue generating opportunities for those businesses.

Feroldi: Yes. Exactly. And there's three ways that they generate revenue. Well, there's four but we'll get into the three that we really care about. The first is storage; so how much data you have stored. That's built on a terabyte/month basis. The second is for computing; so, once you get the data in there, you want to process it, you want to analyze it, you want to draw conclusions from it. So, they can scale up and down your computing needs depending on what kind of information you have and how much computing power you need; that's the second way. The third is when you're doing data transfers, and that's when they charge by terabytes of data. They do have a fourth revenue source, and that is professional services. Where Snowflake employees go in and can help you with any of these functions. That's not something that we as investors really care about, because that is zero gross margin business, but nonetheless, it is something that generates revenue for them.

Lewis: Yeah. And that kind of model isn't uncommon to have some business line like that. You know, at the end of the day you probably need some professional services in there to make sure that clients and customers are happy with what they're getting and they understand how to use everything. You know, I think that a lot of those servicing models, they kind of have to be either not all that big in terms of their contribution revenue or possibly even lost leaders, just to really put clients in a position for success. So, that you see the retention and you see the recurring revenue come through.

Feroldi: Exactly. And they did call it out that they do have it; it's less than 10% of revenue. The only reason I bring that up is because that is obviously a revenue that we really don't care about. Some companies that are a much bigger percentage of revenue, and for those companies you really have to think through the price-to-sales ratio, because that is not revenue that you should pay a price for, like subscription revenue.

Lewis: So, Brian, we talked a little bit about the value prop with specifically talking about data consolidation and, really, the idea of interoperability of data. But let's talk about some of the other benefits that customers get when they're using a Snowflake product.

Feroldi: Yep. So, the real big benefit is that it's extremely easy to use and it's extremely easy to get started. They have a trial period and you can get up and get going. This is the same thing that Twilio uses when they're getting people on board. Again, it's a try us out and pay-as-you-go. That's a very low hurdle for a lot of people to jump over when they're trying to get started. But again, once their data is in there, not only is it universally accessible across all of their employees, but it can also easily be shared with their customers. They have numerous use cases here where they talk about how valuable that is to some partners.

For example, one of their customers has a tremendous amount of health data related to COVID-19 and they can easily share that information with hundreds or even thousands of other Snowflake customers so that they can make business decisions based on updated data that is already within Snowflake's network. And that can affect supply chains, where employees can go, sales calls, etc. So, that is one small example of how sharing data between organizations creates a network effect for this company.

Lewis: Yeah. And we talked about it too, but the pricing model for them is kind of a value prop. In addition to all of the platform elements of it, the idea that you're only paying for what you use is certainly something that I think clients would rather see. So, I think as they're bundling their product and making it available to people that something that I look at and I say, yeah, I would consider that part of the benefit or part of the value proposition.

Feroldi: Yeah. Again, this is a complex thing to really think through, but I think when we get into the numbers you'll see, all right, they're doing something special that the market clearly appreciates.

Lewis: The eye popping number here, Brian, speaking of numbers, is net revenue retention. It is bolded and exclamation pointed in our outline doc. So, I think that we are fairly impressed with this number to say the least. 158%, is there a business that comes to mind that puts up anything close to that?

Feroldi: Again. The only thing that I can think is when Twilio came public that it was, sort of, within that range. And I'm sure that Zoom has gotten pretty close to that given COVID-19. But the amazing thing about that number, the truly amazing thing is, that's down from where it was previously. I'm looking at their net revenue retention rate over the last seven or eight quarters, this was as high as 223% a year ago, and it's fallen all the way to 158%. In their S-1 they specifically called out a major strategy of theirs is to get customers on board and then have them rapidly increase their spending. Boy! Are they doing a great job with that. And I think that that is mostly due to their usage-based model.

Lewis: Yeah, I think back to when we did that Datadog S-1 and we were looking at that company, right? And we were like, oh, my gosh! 140% net revenue retention number. This is incredible, this is some of the best numbers I've ever seen. And this just puts them to shame. I mean, 140% is nothing to sneeze at, but 158% is otherworldly, and it really speaks to the strength of the model. But they're seeing a lot of other really impressive metrics moving in the right direction as well. I mean, the +500 million daily queries, up from 254 million last year. Brian, that's impressive as well.

Feroldi: Yes. That clearly shows that there is value in this platform. Another quick point I just want to make. We talked about 158% net revenue retention; "retention," that's the good one. Not expansion, retention. That number is ridiculously impressive. It's wicked impress, Dylan, even.

Lewis: Is that a new bit. Did we just discover a new Industry Focus bit, Brian?

Feroldi: I think we're going to have to. We'll call this one, Snowflake, a wicked good company.

Lewis: Oh! Let's see what the listeners have to say about that.

Feroldi: But let's take a couple of the other numbers. Last quarter, revenue growth for this company was 121%; that was up sharply year-over-year. And for the first six months of 2020, you were talking about $242 million in revenue. Importantly, Dylan, during that huge revenue expansion phase, gross margin expanded. It was 49% last year; 62% this year. You combine those two, and gross profit tripled. Wow!

Lewis: That's remarkable. And I'm guessing, as this business gets bigger, that gross margin is probably going to expand a little bit more. We're starting to see the early signs of leverage. And this is something that we often look for in companies, because, you know, like, 49% is not bad, but we see a lot of cloud companies, and a lot of software companies in particular, operating in that 60%, 70%, if you're really good, in the 80% range. And that's where you're getting more of every dollar of sales flowing down through the rest of the income statement. That's really helpful as a business, and that's something you enjoy because you're able to leverage some of your fixed costs that come with actually delivering the revenue that you're collecting from your customers.

Feroldi: Yeah. I do think there's more room for that number to grow. However, it's also worth remembering with the business model here, they sit on top of AWS, Azure, and Google Cloud and the more that their customers buy from them, the more that they are going to have to buy from those cloud providers. So, I think that there's probably a cap on this number, but at 62%, I could see it getting into, say, the low-70%s overtime with more scale.

Lewis: That's a great point and I should have emphasized that, Brian. But yeah, this isn't the fixed-cost model that we see with a lot of equipment build-outs, they're going to have some variable costs really driving the cost of their delivery of the services that they're giving to their customers, because they're making those buying commitments.

Brian, not surprisingly, with the growth numbers we're talking about, pretty heavy spend on sales and marketing.

Feroldi: Yeah, you could call it that. They have been plowing every dollar that they can find back into the business. And sales and marketing expenses are really exploding, as well as R&D and G&A. So, because of that this company has a really big net loss. I mean, $133 million in revenue last quarter; $77 million net loss. That is a lot of spending.

Lewis: Yeah. And companies lose money for a variety of reasons, this is the kind of company losing money situation that I think people can generally be comfortable with and get behind, because if you're growing your topline at this rate and you're trying to establish yourself as a major player in a space that we know is just going to dominate tech for the next 10, 15, 20 years, it's a land grab phase and you want to make sure that you are getting as much land as you can so that you can take what you're doing, which is obviously working with your customers, and then hopefully be able to reinvest in your business, grow things out. It would be a mistake for them to be posting income that they are then going to be taxed on when they can so much better put that money to use by reinvesting in their business.

Feroldi: Yeah. And again, so after speaking with some of our colleagues, I learned that The Motley Fool is a customer of Snowflakes, and one of the benefits that Snowflake provides is, every customer gets not only a sales rep but also a professional data analyst that can help. So, you can clearly see that kind of customer service in the numbers. From what I understand, that kind of service is valued, especially in the beginning. So, not that surprising, but still, these are still some staggering net losses.

Lewis: They are, they are big. And actually, Brian, I want to take a pause here and talk a little bit about what their customer acquisition approach looks like, because I think it's probably a little bit different than what most people think of. Because we spend so much time when we're talking about cloud companies, talking about software companies. And so, there you can maybe appeal to a mid level decision maker, someone who has the ability to steer what tech department is using. You know, if it's a CRM software or something like that, then they can expand usage within that organization once they're embedded in there; the classic land and expand model.

This is a little different, because of the scale that these operations are on and how critical they are to the operations of the company, Snowflake is focusing much more on the Chief Information Officer or the Chief Technology Officer for the new customer acquisitions. They aren't going to be appealing to those mid level managers in the way that some of the software companies that we normally talk about are.

Feroldi: Yeah. So, getting their foot in the door is an expensive proposition upfront. However, those costs are worth it, and that is why Snowflake is plowing everything they can into sales and marketing. And on the flipside, if it's that hard and expensive for them to get in, it's also that hard and expensive for their competitors to get in. So, there's two sides of that coin.

Lewis: Yeah. And I mean, that could be viewed as a moat, particularly when the retention rates are as impressive as they are, because obviously that is money well spent if you're thinking about the lifetime value of the customers that are coming in.

Feroldi: Yeah. I think that that's fair. Now the good news is, even prior to the IPO here, this company has a ton of cash. $886 million in cash prior to the IPO. They also have $1.4 billion in redeemable convertible stock. That stock will likely be converted at the IPO, plus however much capital that they're going to raise. So, from what I see, and we still don't have the final numbers because they have not come public yet, I think it's reasonable to assume that they're going to have a ton of cash and no debt.

Lewis: We talked a little bit about switching costs before and the importance of getting in when people are making these initial investments, possibly getting into a space they currently aren't investing in as a company. What else do you see there in terms of moats, maybe competitive strengths and things like that?

Feroldi: Yeah, I think that switching cost is the big one here. It's so hard to get all of your data moved over to a platform. Once it's there, everyone is comfortable, everyone is using it. And, again, it rests on top of three of the biggest cloud providers, so you can move them around while staying a Snowflake customer. That does provide some pretty sizable switching costs.

The other moat that I think that is worth mentioning here is that network effect that we talked about before, where once you're on Snowflake's platform, it's easy to share with partners, with customers, with other data providers, all while staying in Snowflake's ecosystem. So, they called that out as the network effect. I don't think it's the strongest network effect that we've ever seen, because I don't know how interested, say, a bank would be with sharing their data with an oil company or something along those lines. I do think there are some uses when sharing data makes sense, but I don't think it's a true network effect where every new user provides value to all users. But I do think there is a weak network effect at play here.

Lewis: Yeah, I think that makes sense to me. I mean, you could definitely see that being a benefit to someone who has outsourced a significant business operation to a major partner, maybe it's payment processing, maybe it's marketing, maybe it's CRM, maybe they have an agency, who knows. But that interoperability makes sense. But I do think that you could set similar things up outside of Snowflake if you wanted to. It would be painful to make that switch, but it wouldn't kill you.

Feroldi: Yeah. Again, that's one of the benefits of Snowflake, it makes that process easy. So, they call it out as a long-term competitive advantage. I buy it, just I don't think you should give them full credit for their moat.

Lewis: You get half a gold star. This is already a pretty sizable business, Brian. You mentioned earlier that they raised just under $0.5 billion from Dragoneer earlier this year, putting their valuation north of $10 billion. A big part of that is they're going after a pretty sizable market. We've talked a lot about how important cloud is. And you know, I mean, AWS, Google Cloud, and Azure have proven to be massive businesses. There are some pretty big expectations and pretty big opportunities in front of this company.

Feroldi: Yeah. So, management claims that its total addressable market opportunity for its cloud is currently about $81 billion. At this run-rate, it looks like they're going to do about $600 million-ish in revenue for the year. So, that's still sub 1% of their theoretical potential in cloud. The market for data analytics is also massive; that's another $56 billion market that they're going after. You combine them two together, it's very clear there's room to grow. And if you just zoom out and if just consider the big picture, we are creating unprecedented amounts of data. And the amount of data that humanity is going to generate is estimated to grow at a 27% compound annual growth rate between now and 2025; that necessitates the need for data storage and data analytics services like this. The point is, the market opportunity here is massive.

Lewis: Cloud is not going anywhere. I think that's a pretty safe bet over the next decade, and I'm sure Tim Beyers would agree with me. One of the things that we always want to look at, Brian, when we're looking at these prospectuses is the customer base for these companies. Particularly, how spread out is it and is there any one single customer that provides so much of their revenue that it becomes a risk to the business?

Feroldi: Yeah. And they call out that they have over 3,000 customers at this point. That is double where it was a year ago; that's certainly a good sign. 56 of their 3,000 customers are going to spend more than $1 million with Snowflake this year; that's a good sign. They call out that their net promoter score metric, that we Fools love to look at, was 71; that is excellent. They did say that last year Capital One was a 10% customer for them. In fact, it was 11% of total revenue in the last fiscal year. They've grown so much that Capital One is no longer a 10% customer for them. So, when I look up-and-down, I see customers like FactSet Research, McKesson, Sony, DoorDash, Adobe, DocuSign, Nielsen, and on and on and on. Customer concentration, not an issue here.

Lewis: Yeah. And as I understand that they are in, I think, 7 of the Fortune 10, and 150 of the Fortune 500. So, they are starting to work with some pretty big names, but there's obviously a lot of greenfield ahead of them in the Fortune 500 alone.

Feroldi: Yep. And another thing we like to think about is pricing power or expansion opportunity. It's obvious to me, when I look at that gross margin and how it's grown significantly over the last couple of years and there's probably still some upside, that this company does have some pricing power. So, A+ from me on the customers.

Lewis: Switching over to management and culture; we always have to, kind of, check that box as well, Brian. Folks that have followed some of our conversations about ServiceNow, might recognize the name at the top of the food chain here. CEO, Frank Slootman, was the former CEO of ServiceNow; he served there for about six years. And he is the Head of Snowflake now; not the Founder of the company, though.

Feroldi: Yes. And he had a very productive career at ServiceNow. He helped take the company from, I think, a $100 million in revenue to a +1 billion. He helped take them public. Anybody who bought at the IPO or any time thereafter has done fabulously well. ServiceNow has been a great performer. So, yes, he did join Snowflake recently. He is incentivized for this company to be successful. He himself owns more than 15 million shares, stock, they had to pay up to get him, but given his pedigree, I understand why they did so.

Lewis: Yeah, the pedigree is there. I think what's interesting about Slootman is, he clearly has a strong track record of being an effective executive. He is a little bit more of a pro executive, someone who knows how to run a business well and move it along. He's someone who can, kind of, drive the execution of things. There are pros and cons to having someone like that in the executive suite.

Feroldi: Yeah, there definitely are. He's a professional executive and he needs to be compensated accordingly. But the good news here is that the two Co-Founders are still involved and in the C-suite. One is the CTO, the other is the President of Product. And they both hold a decent slug of stock themselves. This setup reminds me a little bit of Google when they were first out of the gate. Larry Page and Sergey Brin were still in the C-suite and they brought in Eric Schmidt, a professional CEO, to kind of get them through. So, a similar setup here.

Lewis: Yeah, it can be helpful to have an adult in the room. And if you wind up investing as the company goes public, you will be alongside some pretty well-heeled investors. They have raised, I think, from Sequoia Capital, as well as a lot of other pretty big names in the private equity space.

Feroldi: Yep. They've raised billions of dollars in capital at this point, as you pointed out, from like, Redpoint Ventures, Iconiq, Altimeter Capital and Sequoia. So, they do have some heavy hitters behind them.

Lewis: Ventures. I should have said ventures, not private equity, that's my mistake. But, hey, we're doing this live, Brian, right? We talked about it a little before, but the risks and competition here, I can't help but see Roku when I look at this business. Just because of the way that they are playing in a space and they're, kind of, a frenemy who makes it easy to use services that are also owned by people who have hardware ambitions. And so, I do wonder if there's a risk at some point of one of these major players, whether it's AWS, Azure or Google Cloud saying, you know, I don't know if we need you to be doing this?

Feroldi: I think that that's fair, but you have to also remember, the better Snowflake does, the more businesses their customers gain too. So, it is a bit of a frenemy situation that's going on there. And again, if you look at just the growth rate in both the customer count as well as the spending, it's clear that there is a huge demand for a Switzerland-isque cloud provider, and that is exactly what Snowflake does. So, yes, they're competing against Amazon, Microsoft, and Google, but they're also partners that are giving them money. So, that will be a relationship to monitor for sure.

Lewis: I mentioned that their most recent valuation put them north of $10 billion. I am sure that when shares hit the public market, it is going to be at a healthy, healthy valuation, it's probably going to be pretty darn rich. I don't have a firm idea of what that market cap might be, Brian, but I think it's going to be pretty high as a multiple times sales.

Feroldi: Yeah. I mean, I've seen estimates between $20 billion and $30 billion. Again, this company is going to do about $600 million in revenue or so this year. Therefore, that right there could be a price-to-sales ratio of 50. But when you look at some of the other companies we've talked about before on the show, on the S-1s, we've done big commerce, we've done Zoom, for example, those companies enjoy even healthier premiums than that. So, I'm sure it's going to be huge and I'm sure it's going to even pop after the IPO.

Lewis: Yeah, I mean Datadog went public at a very rich valuation. And I think they're up about threefold on where shares, kind of, first became available for the average investor. So, quality is often worth paying for. And one of the things that I think we're noticing more and more is we're probably underestimating the strength of some of these cloud and tech business models. They are so different from what we have seen in the market over the last, you know, basically everything prior to 2015 in terms of growth, margin profile, and future profitability. Unfortunately, that means that you've got to pay a steep price now for it.

Feroldi: A super steep price. But again, this model reminds me of Twilio very much, because its usage-based on what has happened to Twilio, how have Twilio's shareholders done if they had bought at any time? Fantastic, is the answer.

Lewis: As I can attest as someone who owns shares. Before we wrap up, Brian, I have to ask, are you going to buy the "wicked" Snowflake?

Feroldi: I might. I mean, I'm still thinking through. You know, after we get off here, for this weekend tech, Tim and Tom are going to be doing a deep dive on the technology here. I still really want to make sure I understand that before I go, and I want to get a better understanding of how the company performs as a public company, but I could see myself pulling a Joey Solitro and buying some shares on day one here. How about you, Dylan?

Lewis: You know, you'd be in pretty good company. Joey does alright for himself as an investor. He has a lot of multi-baggers to his name. So, that isn't necessarily a bad thing. I'm a little bit with you. I think I need to get a better grip on the tech and really how differentiated they are and how strong that value proposition is. I want to talk a little bit more with some internal Fools about that to get a better handle on things. But this is a really compelling business, and that net retention rate number is just, I think, the sticker figure for this company. And very often when you see a number like that, it's worth investing alongside. I know Tom Gardner and Asit Sharma and have talked a lot about ServiceNow recently. And the number that they point to over and over again is 97%, 98% customer retention rate. So, that means they're losing 2% or 3% of their customers every year.

Those types of numbers, when you see them, are often a sign of a very successful business and a very good product. And it sticks out when you do, when you see them.

Feroldi: And you also got to consider the quality of the customers that Snowflake is going after. This is a product that you might not, you probably don't need if you are a very small consumer of data, you can just go straight to Amazon. This is a product that appeals to the biggest companies out there that have massive amounts of data needs. The nice thing about those customers is, they don't go out of business all that often and, man! are they sticky.

Lewis: Well, Brian, I had a real blast talking with you about this. And unfortunately, now we just need to wait for the company to go public. Now, we just have to play the waiting game.

Feroldi: That's right, until we get the rest of the information. Dylan, I had a wicked fun time.

Lewis: I love it. And I'll talk with you next week, it'll be fun.

Feroldi: Sounds good, bud!

Lewis: All right, listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey!" shoot us an email over at [email protected], or tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or wherever you get your podcasts.

As always, people on the program might own the companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for all his work behind the glass today. Thank you for listening, until next time, Fool on!