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Snowflake Boosts Expected IPO Pricing Range

By Evan Niu, CFA – Sep 14, 2020 at 6:26PM

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This offering is going to be pricey in more ways than one.

Ahead of its expected IPO (initial public offering) pricing date tomorrow, cloud-based data-warehousing start-up Snowflake boosted its expected pricing range to $100 to $110 per share, up from the previous range of $75 to $85. The increase suggests that investor demand for the deal is strong, which will allow Snowflake to raise even more capital to help fund future growth.

Here's what prospective investors need to know.

Generic digital stock chart, showing movements up and down

Snowflake shares are expected to hit the public market this week. Image source: Getty Images.

Valued as high as $30 billion

At the midpoint of the new range ($105), Snowflake now expects to receive net proceeds of $3.3 billion, up from the previous expectation of $2.7 billion. If underwriters exercise their option to purchase additional shares, the haul could rise to as much as $3.8 billion.

Those proceeds will include the two concurrent private placements with Berkshire Hathaway (BRK.A 0.01%) (BRK.B -0.57%) and Salesforce Ventures, the venture capital arm of salesforce.com (CRM -0.34%). The increased range will impact both Berkshire Hathaway and Salesforce Ventures, as the private placement will occur at the same price as the IPO. These investors have agreed to invest $250 million each, which will now buy only 2.4 million shares instead of 3.1 million shares.

Based on the total of 277.3 million Class A and Class B shares that will be outstanding after the offering, Snowflake will be worth $27.7 billion to $30.5 billion. That valuation is a bit higher than the initial estimate of $20.9 billion to $23.7 billion (which was based on a slightly higher number of expected shares).

At the midpoint, Snowflake would be valued at a whopping 72 times its trailing-12-month (TTM) revenue of around $402 million. That's an incredibly lofty valuation even for enterprise software-as-a-service (SaaS) stocks, which often fetch premium valuations because SaaS companies often provide critical services to large enterprise customers while generating high-margin recurring revenue.

Snowflake somewhat justifies this premium with strong growth: Revenue soared 121% in the fiscal second quarter to $133.1 million. TTM revenue is up 138% compared to a year ago. And Snowflake is rapidly expanding its relationships with existing customers, with a 158% net revenue retention rate for the first half of this fiscal year. The company is not yet profitable, but when was the last time investors in high-growth tech stocks cared about black ink?

As is often the case with tech companies these days, Snowflake will have a dual-class structure that's designed to preserve control among insiders. Class B shares are entitled to 10 votes per share, and insiders will collectively wield 98.5% of total voting power, according to the latest prospectus.

It's worth noting that the offering could potentially price even higher than the expected range, which is not uncommon when investor demand is high. The IPO should price tomorrow, and shares will start trading the following day under the ticker "NYSE: SNOW."

Evan Niu, CFA owns shares of Salesforce.com. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Salesforce.com and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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