Snowflake (SNOW 2.67%) has been a divisive stock since it went public three years ago. The bulls were dazzled by its triple-digit-percentage revenue growth and retention rates, but the bears balked at its steep losses, nosebleed valuations, and the competitive threats to its business.
Snowflake priced its IPO at $120 per share, and the stock more than doubled to $245 on its very first trade. It eventually hit an all-time high of $401.89 on Nov. 16, 2021. But today, it trades at only about $160. It lost its luster as its revenue growth cooled off and rising interest rates popped its bubbly valuation.
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Three obvious competitors -- and one emerging one
Investors also started to take Snowflake's competitive threats more seriously as its stock tumbled. In its S-1 filing, the cloud software company names Amazon (AMZN +1.04%) Web Services (AWS), Microsoft (MSFT 2.23%) Azure, and Alphabet's (GOOG +1.49%) (GOOGL +1.50%) Google Cloud Platform (GCP) as its largest competitors.
More specifically, Snowflake's platform competes against AWS Redshift, Azure SQL, and GCP's BigQuery in the increasingly crowded data warehousing market. Snowflake also doesn't have its own cloud infrastructure platform, so it runs its services on AWS, Azure, and GCP. It touts this as a plus -- it is "cloud agnostic." However, it does mean that Snowflake pays recurring cloud hosting fees to its biggest competitors.
Snowflake bears often claim that Amazon, Microsoft, and Google could render the specialist obsolete with aggressive bundling strategies for their own data warehousing services. Yet Snowflake is still growing in the shadow of those cloud infrastructure giants because it's compatible with a wide range of platforms and isn't confined by any walled gardens. However, one emerging rival -- the start-up Databricks -- could actually represent a much bigger threat to Snowflake's future.
NYSE: SNOW
Key Data Points
The similarities and differences
To compare Databricks to Snowflake, one needs to understand the differences between a data lake and a data warehouse.
Databricks hosts a data lake, which is a centralized location for collecting all of an organization's structured and unstructured data. Snowflake operates a data warehouse, which only collects structured data. A data lake can't be easily browsed through like a hard drive. Instead, its users need to use unique identifiers to find the relevant data. A data warehouse is much easier to use because it sorts information into three tiers -- a bottom one for cleaning up the data, a middle one for querying it, and a top one that presents that information to third-party analytics and data visualization software.
Data warehouses are more user-friendly than data lakes, but they're more expensive to scale as an organization expands. Data lakes are messier and require more technical expertise to navigate, but they can be scaled at a much lower cost.
From partners to competitors
At first glance, it might seem like Databricks and Snowflake aren't direct competitors. In fact, the two companies signed a strategic partnership five years ago to bundle their data lake and data warehouse products together. But in late 2021, Databricks launched its own data warehouse platform, Databricks SQL, to compete against Snowflake.
Earlier this year, Databricks reported that its revenue rose 60% to more than $1 billion in its latest fiscal year (which ended in January). Its annual recurring revenue from Databricks SQL also surpassed $100 million in April. That's still much lower than the $1.94 billion in product revenue that Snowflake generated in its fiscal 2023 (which also ended in January), but Databricks' ability to offer its data warehouse as an expansion of its data lake could cause headaches for Snowflake.
Databricks' data lake is also cheaper to scale than Snowflake's data warehouse, so it might have been pulling customers away from Snowflake over the past year as macroeconomic concerns led many companies to rein in their software spending.
We already saw this rivalry flare up in early September after Instacart's IPO filing revealed a steep decline in its spending on Snowflake's services this year. Databricks quickly took credit for that drop by claiming that Instacart had migrated some of that data to its platform, while Snowflake declared that Instacart's numbers were misleading.
Snowflake's investors need to watch out for Databricks' IPO
Databricks is widely expected to go public in the near future. That eagerly anticipated IPO could generate headwinds for Snowflake for two obvious reasons. First, Databricks could raise a lot of cash to fund the expansion of its data lake and data warehouse platforms. Second, Databricks' public debut could pull some investors away from Snowflake, especially if its SQL platform is growing at a faster clip than Snowflake's core business.
All of those challenges could threaten Snowflake's goal of generating $10 billion in product revenue in its fiscal 2029 (which ends in January 2029). To reach that ambitious goal, it will need to grow its product revenue at a compound annual rate of 32% between now and then. That target might seem achievable based on its recent growth rates, but it might not account for Databricks' potential arrival as a publicly traded competitor.
