News of a successful coronavirus vaccine has buoyed the stock market in the past few weeks, and many investors are buying the tech dip that preceded it. As a result, stock in cloud-based data warehouser Snowflake (NYSE:SNOW) has risen 20% since the middle of November. But with so much interest of late, and fresh off the most expensive IPO of the year, is Snowflake at risk for a sudden drop in price?

Snowflake's business is growing at lightspeed

As a cloud data platform, Snowflake leverages the elasticity and performance of the public cloud to enable customers to unify and query big data. Its cloud-native architecture offers three major service layers:

  • Data storage, which creates a unified data record in the cloud.
  • Data computing, which provides dedicated resources to enable simultaneous access to data sets without latency.
  • Data cloud services, which intelligently optimize performance requirements with no administration.

Essentially, Snowflake customers feed massive sets of raw data into the cloud and receive back analytics-ready data, useful for distilling business insights and delivering revenue-generating services. With a highly scalable model that allows customers to pay per use, the company has proven exceedingly popular as more and more businesses turn to cloud-based warehousing solutions.

Total quarterly revenue for Snowflake (in millions)

Image source: Snowflake.

In one year alone, Snowflake has more than doubled its number of customers, with existing customers increasing their usage significantly over time. Consequently, the company's revenue has increased rapidly, growing 121% year over year by the second quarter of fiscal year 2021. On a yearly basis, Snowflake experienced a 174% increase in revenue from fiscal year 2019 to 2020. And all of this is attributable to its competitive advantages.

Competition is fierce

Snowflake is a cloud-based data warehousing service, and the market in which it operates is highly competitive. Current major competitors include similar cloud providers Amazon (NASDAQ:AMZN) Web Services (AWS), Microsoft (NASDAQ:MSFT) Azure, and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Cloud Platform (GCP), as well as established vendors of legacy database and big data services. Many of the company's competitors enjoy substantially greater brand recognition and reputation, as well as higher financial and technical resources. In fact, Snowflake offers its platform on public clouds provided by AWS, Azure, and GCP, with a substantial majority of its business running on the AWS public cloud. 

Despite this, Snowflake has a growing number of customers. Why?

The company takes innovation and customer needs very seriously, consistently adjusting its offerings to accommodate where its competitors currently do not. Snowflake's competitive offerings include integration of diverse data types, massive scalability without sacrificing performance, simultaneous use cases and users, and extreme ease of use. 

Man looking at screen showing stylized big data map

Image source: Getty Images.

Indeed, possibly its greatest competitive advantage comes from its easy-to-use platform and cloud-based architecture. Just as Shopify attracts businesses for its turn-key solutions, Snowflake's made-for-the-cloud platform entices businesses with its scalable, high-performance data-warehousing solution.

Is the company at risk?

However, as a company that runs on its competitors' public clouds, Snowflake exposes itself to some unique risks. Any outages or security issues will affect Snowflake as well.

Furthermore, the company is extremely young, with a limited operating history, and therefore has very little data on which to forecast its future viability. It has also posted deepening operating losses, as the company experiences the costly growth spurt so typical of today's high-value tech stocks. Given this, from fiscal year 2019 to 2020, Snowflake has delivered net losses of $348 million, even though it boasts a gross profit margin of 61%.

Without such aggressive investments in marketing and research, it is highly possible that Snowflake could fall behind its cloud competition, since much of its competitive advantage is based on razor-thin improvements. Of course, for now, the company's offerings are continuously pulling in more customers, which proves that Snowflake's customer-centric approach is very much valued. But if Amazon, for instance, decided to revamp AWS to perform just like Snowflake, the young data platform could easily be swallowed. 

However, that's a risk for any smaller start-up. Businesses are flocking to Snowflake for its exceptional performance and simultaneous user access, as well as its flexible pricing. The company may not prove profitable any time soon, but it certainly seems to cater well to its customers' needs and concerns. Based on its current pattern, Snowflake should continue to see stellar growth in the near term; its far-off future, though, remains to be seen. Cautious investors should wait for more earnings data before buying in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.