Chit Chat Stocks - Snowflake (SNOW) | Not So Deep Dive

Episode Date: April 12, 2022

Snowflake Inc. is a cloud-based data warehousing company. The company enables its customers to consolidate data into a single source of truth. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Snowflake. Enjoy the show! This episode is sponsored by Commonstock, a social network for smart money investors. Check-out the platform here: https://commonstock.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Hhhypergrowth on Snowflake: https://hhhypergrowth.com/tag/snow/ Contact us: [e-mail] Timestamps Company Background | (3:57) Industry | (11:47) Management & Ownership | (14:03) Valuation | (18:01) Earnings | (19:12) Balance Sheet | (22:26) Our Analysis | (24:57) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chit Chat Money. Today, this is the episode where we talk about an individual stock for about 30 to, well, it's not usually not 30

minutes. It's about 40 to 45 minutes. And we're going through something that we look at mostly for the first time, or at least two out of three of us are looking at it for the first time. And I can say for this one, I think all three of us, we're getting a first look here. So hopefully we can kind of introduce a company to you and then maybe inspire you to do more research if it's something that kind of piques your interest. I'm teasing that because Brad Freeman, who's on today, your choice was Snowflake, a highly complicated company. What inspired you to choose this? Just the nice revenue growth race they even put up? Yeah. And then, I mean, whenever, I mean, And we had some pretty ridiculous multiples the last two years, but whenever you get something

trading at a hundred times sales, I mean, it's not, it's not a stock that really appeals to you maybe deeply on a personal level, but when it got there, I mean, just the fact that it could get there in public markets just tells you that, that, that people, I mean, there's, there, there could be something here. I mean, it's not, it's not black and white. It's very much so there are, there are several exceptions to that rule, obviously, but just just how highly people speak of this company on Twitter and the utility that they're providing. And the people speaking about that are Hypergrowth and Muji, who I respect very deeply in this

area, who we'll talk about a little bit more on the show. But yeah, I mean, just really bright people saying great things about this. Frank Slootman, who's the CEO, is a phenomenal track record. So I just wanted to kind of educate myself a little more on what they do. And I'll go ahead and say, I think it might have been 200 times sales when this thing came out. at some point i think i think at some point it was well it depends trailing versus four because usually they're forwards like cut in half since they've been growing 100 year over year uh but yes investors especially the smart i.t investors are very very optimistic about this company so it'd be interesting to take a look i i may have this figure wrong but it's gone from

it may have been a 200 times sales whatever it was down to i think it's we'll preface this now like 50 something times sales so it's been insane multiple compression and the stock has only dropped like 5%. So that shows you the revenue growth that they've been able to put up. Yeah. And when we get into earnings, I'm sure Ryan will highlight some of those strong numbers. But before we start out the show, we have to talk about today's sponsor. Today's episode is brought to you by Common Stock, a social network for smart money investors. We're on there. Brad, are you on Common Stock? Yeah. Yeah. I use it a lot. All right. Yeah. And it is important more than ever to find trustworthy information from people

actually know what they're talking about. Common Stock built a platform to show the portfolios, real-time trades, and analysis of the smartest retail investors. Now, I don't want to, well, we're not smart just because we're on there, but there are good reports on there. It's a lot more signal to noise compared to Twitter. And it lets people link their existing brokers to verify their portfolios and performance, helping you to distinguish, well, I spoiled the ad copy here, the signal from the noise. So visit commonstock.com to join today. If you're tired of all the noise on Twitter and you want to get some good research reports and maybe read some stuff, actually communicate with people in more longer form manner, visit Common Stock. Ryan, do you want

to introduce Snowflake? You got a tall task here. Yeah. I've been watching product demos all morning because this is one where if you just read the 10K, you're going to be lost. It's probably honestly not the best place to start. No. Unless you're an IT person. And yeah, and there's just so much terms or even like, yeah, if you're either not IT

or on a data analytics team, it's going to be hard to like know what all this consists of. So I had to watch a whole bunch of YouTube videos and I think I have an understanding of it now. And so I'll try to explain it the best I can and give a customer use case that I think is helpful. But Snowflake is a relational database that's been purpose-built for the cloud.

And so a relational database is just a type of database that stores and provides access to data points that are related to one another. And so I'm going to steal a quote from hypergrowth.com. That's three H's. He's been on the show before, and I really recommend checking out his work on Snowflake. But he says, companies have to measure and track everything. Data from sales, data from marketing campaigns, data from the supply chain, data from customers, data from partners, data from finance, data from infrastructure,

data from software teams, and data from every SaaS application and service their business is built upon. These tend to be collected in separate data silos where each team within an organization is keeping and accessing the data that pertains to them. Snowflake is a platform that enables organizations to break down these data silos and extract insights from them in a secure way. And so I'll try to give a verbal example and I'm repeating the use case that Snowflake put up on their YouTube page. And if you want to kind of dive deeper into it, there's some intricacies on how the platform actually works and some of like the technical aspects that are unique to them that I recommend going and watching the demo. But I'll go ahead and go through it anyway. So let's say you're working on an analytics team at City Bike in New York City, and you've got a spreadsheet with the rides from the last 12 months.

So let's say you're the data engineer, and that spreadsheet includes name, day, time, ride duration, et cetera, some other things as well. And you wanted to share that information with the rest of the team. On Snowflake, you create a data warehouse and upload the file. From there, Snowflake has the tools to make that data more useful. And so in technical terms, this part is called automated indexing and partitioning. And so let's say another member from your team wants to make use of that information. So they look, they can now go into your data warehouse. They can take a deeper look at the data set that was just uploaded.

And they wanted to say, let's say they were looking for the days with the lowest rides and they see that they're all in February. They probably suspect that has something to do with the weather. So they can then send or they can ask the team member to collect some weather data that say the team members, I keep saying let's say, but the team member could easily find the world weather data and upload it to that same warehouse they previously created and the rest of the team can still access it. And so the team goes in, filters that data specifically to New York City, which is all doable through Snowflake. They can combine the weather data with the ride data, and they find that the shortest ride durations were on the days with snow and the days in February were snowing. So that's now a useful insight that the company can use to potentially take action on it some way, whether that's like offering discounts or something in February. it's the point is they're able to share the data in a seamless manner from different parts of the

company and make the data useful quickly and it's all because it's all in the cloud yeah and it's all and snowflake specifically has tools um that i believe are unique just to them yeah and plus all the partners for visualization and stuff like that yeah that you can plug into the platform and so you might be thinking how do they make money so snowflake charges on a consumption-based model so in that example i just used snowflake charges for storing the data in that data warehouse which can automatically you can set it so it's auto turned off as soon as people are no longer accessing the data but you have to pay for access to i think you also have to pay for access to snowflake this is primarily for big companies i can't think of small businesses really using

I don't think they can afford it. That's kind of the deal. Like I heard someone anecdotally, I saw somewhere that it's just really expensive for a small business, but that's because they're focused on these Fortune 500, Global 2000, as I described. And so that's the more data that people are putting on, putting into Snowflake and using their cloud storage and compute power, they're charging more for it. So, and we're going to talk about the revenue retention number that companies have or that Snowflake has with its companies. A lot of that is because they're just, it's more consumption, more use of the platform, more data being processed through there. But I'll dig into the history a little bit. So, in 2012, three data warehouse experts named Benoit. They're French, right? So, it's hard to say.

Benoit Dagaville or Dagaville, potentially. It's a running joke now that I suck with names, and it's going to continue today. So I'm going to say Benoit Dodgeville, maybe. I don't know. It's French, so I don't know if that sounds correct. But whatever. Dogeville? It's not Doge.

I'm quite confident it's not. Thierry. I'm just going to stick with Thierry. And Marcin Zekowski. So they came together in San Mateo, California. And Benoit and Thierry were actually working at Oracle together in one of the, I guess, data departments. And then Marcin Zukowski had actually, he was the founder of another database management system called VectorWise. So they all kind of knew each other.

They came together and started, they built this platform in 2012, but they were basically in stealth mode, which I've always found was like the most pointless term. It's such a VC thing. But the, or Silicon Valley thing, they did raise money fairly easily. It looks like they had, by 2014, they had 80 organizations using the system at the time. And so they came out of stealth mode. And then by 2018, so less than four years after being founded, they raised $263 million at a $1.5 billion valuation. I think a four-year unicorn might be the youngest, might be the quickest I've ever seen.

Well, I don't know. The market's been pretty hot. so but the quickest you've seen like the quickest we've looked at on the show right i think lemonade pulled it off um although i don't know if their their ev is definitely stopped not still unicorn but um but lemonade pulled it off after i think uh three and a half years or four years something like that they beat them that's quick that was a period where everyone was you know fitting stuff up i will and then in that same year they did another follow-on round which was like three times the price. So they were worth $4 billion within four years. So they got to scale pretty

quickly. And then in 2019, they hired both the ex-CEO and CFO of ServiceNow, so Frank Slootman and Michael Scapelli. So they joined the company and a year later, they went public. I believe Frank Slootman was basically the take us public CEO. They were planning to go public. They wanted to find the right CEO for the job. And I think they went to Frank Slootman. And today they've now been on the public markets for what year, almost two years. Yeah. Coming up on two years in the fall, I believe. All right. I'll move into industry competition. Industry is not too hard to estimate, but for these IT departments, it's also, they're really rough when these third parties go through their estimates. So the data lake market size was estimated to be about $7.6 billion in

2019. That is expected to grow at a 20% CAGR through 2027. And then data warehousing, that market is estimated to be $21 billion in 2019 and is expected to reach $50 billion within this decade. Snowflakes management believes that they have a $90 billion total addressable market. And what they say that all they're saying is that there's $90 billion in revenue for them to go after in all the different things they're trying to do. Mainly it's data lakes and data warehousing but i think the big takeaway is these industries are not huge but they're growing really really quickly especially the cloud-based ones now competitors the it's well it's pretty easy to see the competitors at least the big ones it's the big three

infrastructure providers for the cloud which is amazon web services microsoft azure and google cloud but what's interesting is snowflake is the multi-cloud provider uh or whatever i might get definitions cloud agnostic they're cloud agnostic they use all three or when you're using snowflake you have the ability to use all three so they're frenemies because snowflake is providing compute to say aws gcp or azure but those companies have their own data lakes and data warehouses so frenemies then there's also ibm who you throw out but they have a cloud division there's Oracle, who's a pretty big database company. There's MongoDB, which is another startup one that's more cloud-based, but they're slightly different than Snowflake. I don't know

the exact details. There's Databricks, don't know much about them. And then a lot of other ones and open source projects. I mean, this is a huge, I mean, database stuff and whatever you'd want to call this is a huge part of all sorts of startups. Like that's one of the key things that get funded all the time because it's such a big market and it's because it's kind of the core competency of Silicon Valley. So you should expect a lot of companies to come out of there, but Snowflake's kind of one, at least so far. Brad, do you want to talk management and ownership? Yeah, let's do it. So CEO is Frank Slootman. He was with ServiceNow as the CEO for six years. So I've listened to him on a lot of interviews. I know him well, and that's not super common for

me with public CEOs and we're doing new companies, but just personal opinion, really enjoy listening to him speak. And he's very level-headed and calm, cool, and collected in my opinion. But so CEO of ServiceNow for six years, he was the president and CEO of Data Domain before that, which grew into an IPO in 2007, and then was sold to EMC in a really competitive bidding war, which is always nice to see for a company you run. 94% glass door rating with a few hundred reviews and they're, I mean, take it with a grain of salt, but they're showered, showered with workplace accolades pretty constantly, pretty frequently. So, um, not a, not an amazing piece of news, but just a contributor for, um, enthusiasm, I guess, but a co-founder that I will

cite. Yeah, go ahead, Ryan. Yeah. It is a culture that I hear a lot of people talk about, uh, I guess in the financial community where apparently Slootman is like a very disciplined guy. compares himself to general patent he's probably the most football coachy ceo out there you know what i mean like he's very but he it seems like they like to reward people pretty heavily given their stock comp so it's very aggressive but they pay people well sorry brad continue no no that was a that was a good that was a good note i think there's a lot of similarities between him and i know a lot of our listeners know anthony noto pretty well um just how they kind of handle running companies with um football military that that kind of perspective and that kind of no

nonsense mentality that they remind me of each other. The companies don't remind me of each other at all, but those two personalities sort of remind me of each other. But the co-founder that I want to talk about is Benoit Dageville. Yeah. So I'm sorry, Benoit. We'll figure it out. Benoit is correct. That's correct. Benoit is correct. Yeah, I know that's correct. But he was a database architect at Oracle for 16 years before he and the other co-founders that Ryan talked about, created Snowflake and really got the ball rolling. The CFO is Michael Scarpelli. So he was with Slootman at ServiceNow for all six years that Slootman was there. He was a former Nutanix board member, former partner at PricewaterhouseCooper. In terms of ownership,

Frank Slootman, I wasn't really expecting this just considering how new he is to the company, but he does own 5% of the firm, which maybe hints at what Brett was talking about with aggressive stock-based compensation. Benoit, who I'm going to call, I'm going to call him Benoit for the rest of the show, owns 2.7% of the company. All directors and officers combined own 11.3%. Altimeter owns 11.1%, Sequoia 7%, Iconic owns 11%. And then I know we all know Benioff was involved in the IPO. Buffett, I guess you could say Berkshire Hathaway was involved in it, but it wasn't him. But still, it was his firm. So good to point out that they saw something or somebody that Warren Buffett saw something in, saw something in Snowflake. So I guess that's the

bull case. But yeah, that's a good place to leave off for ownership. It's Buffett, one investor removed. And I will also mention that these are, unless the proxy was outdated, I believe a lot of venture capital firms still are holding Snowflake. I know at least Altimeter is. Yeah. I listened to an interview and said, well, they're a crossover. Maybe some of the other ones are different, but that's a pretty good indicator. What do they call it? A cap table? I don't like that term because it's like a Silicon Valley term. I don't know why I just disdain the Silicon Valley terms. But yeah, I think with Berkshire Hathaway, they have a lot of businesses. I'm sure one of them, most likely probably Geico, started using Snowflake when it was like, wow, this is very

useful and we spent a lot of money with them so we should probably you know maybe buy the stock this episode is brought to you by la quinta by windham here you are miles from home and ready to start your vacation good thing you're staying at la quinta by windham they have free high speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. I'll hit valuation. Pretty simple one. I mean, market cap $66.7 billion. Ticker is snow. So S-N-O-W, very easy one. Enterprise value due to their high cash balance and no debt is only $61.6 billion.

So they have north of $5 billion in cash that is helping with that cushion there. I think the best manage trick for tracking their multiple right now is probably EBIT gross profit. I wouldn't use free cashflow because they have a high amount of deferred revenue that it's going to inflate cashflow in the short term because they have people pay upfront on these credits. And while they're growing quickly, it's not, I don't think it's indicative of their steady state margins, but they do have good working capital advantage as we might discuss, but they're easy to gross profit is 81. So very, very expensive. Yeah. I don't think there's any way to get around it. That's expecting a lot there.

And then if you look at the stock options, they claim the conference call that they're on pace for only 1% dilution, but I'll believe it when I see it. And I think looking at historically, you might want to factor in 5% dilution to be conservative, maybe 3% to 4%, but it's heavy dilution, just part of the deal here. All right, Ryan, do you want to hit earnings? Yeah, for the full year 2022, or the fiscal year 2022, which is what they call it, they had $1.1 billion in revenue. That was up 106% year over year. But as Brett alluded to, they had $2.6 million in remaining performance obligation. And so companies buy credits

essentially, and then some of those credits go unused. And it's for discounts. So you can get discounts if you buy upfront. Yeah. And you can roll over the credits, but also you're just paying, usually you're paying upfront. And so that's where you see that big deferred revenue number. So they do have a lot of visibility into how much they're going to earn. Like I said, $2.6 billion in remaining performance obligation, which also grew 99% year over year. They had 70% gross margins. And then their free cashflow margin was about 12%. There was a, I want to say it was $600 million in stock-based compensation. It was basically all that. Yeah. so just a ton of stock comp and there's even an anecdote which uh i'll just i'll just mention it now i believe at one point frank slootman was making 95 million because of his stop

stock options plan which it was a four-year stock options plan that started in 2019 because of that he was making 95 million dollars a month yeah which was more than they were generating in revenue per month, or, or maybe it was a little less. They wanted him to be incentivized. Yes. So I guess he is now. Yeah. So he, he had quite a payday. And he is also now a huge owner of the company as Brad mentioned, because of that compensation. But, but, but when we keep saying SBC or when we keep talking about how stock comp,

that's actually what we're referring to primarily. And then as of the last quarter, Snowflake had 5,944 total customers, roughly 50% of the Fortune 500 used them. And their total customer count was, it only grew 44% year over year, which I know I'm saying only grew, but it's like relative to their revenue growth, that seems like a small figure. They had a dollar-based net retention rate, net revenue retention rate of 178%. That's maybe the best, that is an insane figure. D-local. Yeah. Right. The only one I've seen is probably D-local.

Yeah. Yeah. There was, so I guess for maybe to clarify for anyone who doesn't know, that's just saying that their existing customers spent 78% more with them the following year. And that, I can't think of a better, I can't think of better validation from an investor's perspective as to how important this platform is for their customers. And that's a highlight of the consumption model. That's the benefit is I believe on the consumption model and it's across IT, maybe payments, SaaS, whatever. The most impressive net retention rates I've seen have all been consumption. I think Twilio was up there at one point. MongoDB was up there at one point. Not as high as Snowflake, but that's the benefit of the consumption model is that they have to pay for more and while they're using more data, it's kind of flown in. All right. Balance sheet, liquidity, Brad? Yeah. And maybe just a little more context on the Dibner number. I get really excited about 130% for a company. I mean, that's phenomenal. So 178% is just, I mean, it can be understated how impressive that is, but a balance sheet and liquidity, it's a fortress balance sheet, which is pretty, yeah, I'll leave it there. So they have no debt, no interest expense.

I mean, their net interest expense is actually income because they have short-term debt security investments, but they've got around almost 4 billion in cash equivalents in short-term investments, another 500 million in net receivables, pre-cashflow positive. But again, we were talking about deferred revenue, also stock-based comp was 600. So net loss was 680 million, stock-based comp was 600 million. So that's really, it is helping a lot. And then just based on taking current share counts and what they're guiding to by the end of 2022, it actually looks like 5% to 10% dilution to me, just based on the different

metrics. I used a trailing 12-month or current quarter or anything like that. So check me on that because it sounds like Brett is saying 1%. I was thinking multiple years, like if you're going to model. Gotcha. Yeah. Maybe just double check me on that just to make sure I'm right if you're looking more into this company. But just based on Coifin and YCharts data and what they're guiding to for the end of this year, which again, that could still be rollover, hangover effect from the IPO, uh, five to 10%. Um, but, but love to hear that it's, it's hopefully going to get down to one, two, 3%, something like that. That's what they said. I'll believe it when I say it, but that's, that's what they're saying. Maybe they're rolling off IPO, but yeah,

that's the big concern. The other thing is, so we, we analyze, we take a look at the balance sheet for every one of these episodes. And sometimes it's more important than others. I would say that in this case, there isn't a whole lot to analyze. They have a ton of cash. And it's because they're using the stock. They're not using debt. That's how they're financing. Right. And they raised a ton of money at the IPO as well, which sounds sometimes for the investors that bought it at the IPO, listen, that sucks. But for investors that are considering it now, they have a ton of capital to deploy into the business, a ton of runway to make investments. They can get even more aggressive if they want to.

Right. So now it's an advantage when you invest at the IPO that I sorry if you did, but the but now that it is an advantage because they were able to raise capital pretty easily. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real time alerts like this one, so you don't have to worry about malware or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? All blocked. Thanks to advanced security. Included with Cox Panoramic Wi-Fi.

Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Do we want to move to anecdotal evidence? Yeah. Brad, I'm assuming you got nothing. I just want to check. I mean, I like playing in the snow and making snow angels. But aside from that, that is about as sophisticated as anecdotal evidence as I can offer here.

it's a good name i like that the term that muji from hyper growth calls it calls it the dad of lake house that's a good term i would check out his his his write-ups are very comprehensive if you wanted the details of that you read the whole thing but if you're confused on how this stuff works check out his graphics that not graphics uh he made little what do you call those things that are like slides almost you like drew them like kind of charts time i don't know they're like flowing flow charts, flow charts, flow charts, where it's like explaining where the data comes from and then how it gets all the way to say the business vice president who makes decisions. It's very helpful in understanding what they do. Yeah. And I've never used the

platform, but I did, I think it's worth, if you're really trying to get a good grasp on the business, I think it's worth going in and looking at the product demos and Snowflake gave, do they have a YouTube page? Yeah. Snowflake produced one that's like eight minutes and you can just see the technical expertise that the platform has. I mean, if you're in different parts, so let's say you're on the analytics team and one's a data engineer, this is the example they used, the data engineer uploads or creates a data warehouse, you can use the same data from within that warehouse at the exact same time and so it's shared data without limiting the compute resources which is pretty i believe that's

pretty advanced i could be wrong i'm not super i don't have a huge understanding of the uh competitive landscape but it's a really cool platform just to kind of look at it and see what what does this give a big business and you can see how much value it provides just by watching the demo all right let's move on to future growth opportunities brad what do you got for us um so So again, not a data lake house, as Muji says, an expert, but it seems to me like Google Cloud and that third kind of public cloud pioneer entering the fold and starting to gain a little bit of market share could just feed into that data siloing and cloud siloing problem that companies have and could enhance the frequency that Snowflakes customers are dealing with three separate public cloud vendors. And I think that just slightly adds to the utility and the appeal of tearing down those data silo walls, Mr. Gorbachev. So yeah, so you think the growth of Google Cloud kind of becoming the third player is

important that they can have another company to leverage? Yeah, yeah, I think it just creates more competition and more optionality. So it will create more frequent instances of using multiple vendors within the same company for different things. And I think that could help. Again, I'm not a Snowflake expert, but that makes sense to me. Yeah, that does make sense. All right, Ryan, what do you got? I apparently forgot to put one down. Do you want me to do it?

I just acquired something for $800 million that is also only doing $100K in revenue. Do you want to look that up? Sure, I'll take a look at it. look at the definition of that but i'll i'll move up from our mind is moving up from the lake house which if i'm getting the flow chart right you get the data ingestion to the lake the data lake which is snowflake and then you go to the warehouse thing which is like for the data analysts could be getting that wrong but then you move up to analytics and visualization where that's where you're on say tableau alterex something like that and that's when someone like a marketer or a vp of something is looking at you know charts and all that good stuff and tables and stuff

that's actually readable for someone that's not a data scientist i think moving up to there is very doable for them now that could get messy because they can start competing with partners But I think it's a nice logistical step, at least kind of vertically integrating across that for their platform. Because if people are on Snowflake, if they're already using these partner stuff, maybe even acquiring some of these visualization customers, they've explicitly mentioned it before moving up, I believe. There's a lot of different terms that they throw out, so it's hard to track. But I think just moving up from that, it can be very valuable. I mean, I don't know what AlterX's market cap is. Tableau got acquired for like $15 billion.

It's pretty valuable, the data visualization. stuff and getting from you know the lake and the warehouse to the what do they call it business intelligence ryan as you come up with something you see that what was it streamlet yeah so they they acquired a company called streamlet for 800 million dollars i'm not going to be able to know exactly or explain what they do uh it would take me a while to figure it out but here's a comment from the uh founder he said we we have both the same vision streamlet and snowflake which is all about democratizing access to data. I would describe it very simply as making it super easy to interact with data. Maybe that's moving on market. I don't know. Yeah. Apparently they do

a faster, it's a faster way to build and share data apps. I think it's too complex for me to have some sort of like technical future growth opportunity. So I'll pose this question. How big do you think or how far away do you think they are from a customer ceiling uh that's what i worry about if yeah i guess we'll talk about that in low lights too but we can just talk about it now i they're in half of what probably the biggest companies in the world yeah if they get to all of them how small the business is too small for them because it feels like you have to be very very big so i i do think that's a slight concern but the data that all these companies are ingesting continues to grow however some of the biggest ones on the flip side again the mega cap tech

companies i believe do this in-house i know someone that works at twitter that works on their data database team and they're one of the largest in the world and they don't i believe they use that could be totally wrong but i believe they had to build it themselves and then chose to just because like it's too complex like google i feel like google amazon microsoft facebook are all doing it themselves right well they have i'm sure they use aws or google well i mean aws or google cloud and microsoft are using asher or whatever but they're doing it themselves if i'm right yeah that makes sense facebook always does everything themselves it seems like most most things that is my that is my concern like you got to be a pretty big company i would

think to use this now obviously the data that you're putting into it is going to expand over time. But I guess that would be my only concern. There is always the potential for international expansion. They threw that in their 10K, but that's a cop-out for growth opportunities. So we're not allowed to use that. Yeah. It's a tiny part of the business right now, but maybe that'll be a big growth driver as well. All right. Let's move on to highlights and lowlights. I'm sure we'll talk about that as well with here. Brad, what did you like and dislike about this business? Yeah. So I think Slootman and his team are superstars. I think their track record of success at ServiceNow and before that of creating a public market bidding

war is just something that I find very compelling. Now there's some stock-based comp things that make that slightly less compelling, but Slootman is extremely highly regarded in his industry. And that means a lot to me as someone who's not an expert in the industry and leading on other people who have more expert opinions on him and them being pretty unanimously positive about his leadership and his ability to steer the company. So the low light, I think, I spoke with a few people who are more in this data lake world than I am, and they talked a lot about Databricks and how they are a very formidable competitor and probably will be public in the not too distant future, so we'll have a lot more money to spend.

Not to say the word valuation while saying the word valuation in this, but I think a lot of people are underwriting almost a monopoly or a pretty close to monopoly market share for this company or just an absolutely massive market share, just based on the fact that it got to 200 times sales like we were talking about earlier. But there are other competitors who can maybe take a piece of this market. I know we make fun of IBM, but Microsoft and Google and Amazon can figure things out. Athena is another and Redshift is another. And Databricks is one that has just been highlighted by several people that I've spoken to about emulating and in some cases, enhancing the value proposition that snowflake is offering so what about did they say anything

about mongodb or is that slightly different than what's new uh we mongodb didn't really come up in our conversation um and and well it actually did very briefly and and the thoughts weren't extremely positive so i'll probably just just leave it there uh but um but yeah databricks is the one that everyone was most excited about including snowflake so i want to keep an eye on that? Yeah, because the thing, I don't know if Databricks has the same model as MongoDB. The thing that makes me concerned about

maybe the competitive landscape is if Snowflake isn't getting that funnel of tiny companies and little startups, kind of like MongoDB is with the freemium model, that might give them a disadvantage. Alright, highlights for me,

I think we can all tell how wonderful of a business model this is, and And I mean, the big highlight is how crucial this is becoming for the companies that use it. If that can apply to all their new customers as well, and they can continue to increase the spend, I think they're forecasting like 150% dollar-based net revenue retention rate for the upcoming year.

I mean, for someone who doesn't understand the platform, like the ins and outs and the competitive landscape, that's the most useful metric is how much their existing customers are spending on it. So that's kind of my highlight. The low lights for me is it feels like this is a company that prioritizes pain management and employees over rewarding shareholders that could change over time. And that's good for the employees and management, but we're determining whether or not we want to be shareholders. So that is a knock. And a lot of that is obviously attributable to the executive comp. The other thing is there's going to be another options package in probably, I think, a year or two. Potentially, potentially. They might

not, but most likely, yeah. What's that going to look like? Is it going to be less than Frank Slootman got in his last one? It's probably going to have some aggressive growth targets. Better be less. Better be less. But that is, I mean, that's, that's, you know, that's a lot of money that was pulled from potentially could be shareholder dollars. Yeah. We're not money delusion. Right. What about you?

I agree with you guys. It seems like the best built service for the cloud needs now, maybe Databricks is up there. So I don't know much about them. So that kind of leads into our, how we don't understand the competitive landscape at all, really, or just a little bit. I think they have a fast-moving leadership team that is really good at pushing the pedal down to the floor, great unit economics, and that working capital advantage where everyone's paying stuff up front. That lets them finance that business internally. And then that, I think a highlight was just the RPO, which, again, is the remaining performance obligation.

That continues to grow rapidly. And if that gets to, right now, what is it, two and a half times revenue? I mean, if that continues to grow at the same pace as revenue, that could hit $10 billion sooner. That basically guarantees revenue for a few years. I mean, it's very, very predictable. Lowlights, though, I talked about this already, but moving into smaller businesses, they've set themselves up, I think, at a little bit of a disadvantage because I would love them to do a freemium model.

Maybe I'm totally missing the point here, but if you're getting the small startups to use you and then you have to graduate once you hit, say, I don't know what the little kpi is for like just data points or maybe it's megabytes or gigabytes petabytes petabytes i know but once you hit like a certain threshold you have to start paying it seems like they want that startup funnel but i could be wrong because for example like someone like uh like ian startup that he's doing merlin you would want them to start out yeah in case they become huge you want them to start out with you i don't know that's just some uh you know even medium-sized businesses are having trouble spending with snowflake sbc we already talked about the last question i have is

is management just mercenaries that's a huge concern yeah i think we all had the same low light for that one uh let's move to bull case brad what do you have yeah what was that app called again? Merlin? Merlin, yeah. Merlin, interesting. Maybe some listeners should check that out. Yeah, but Bullcase, Bullcase, back to business. So I'm actually going to tie my Bullcase and Bearcase together because it's pretty much a yin and yang here. So I really think in order for this to succeed, it has to be an objectively better product than all three public cloud vendors are going to provide the next several years that Databricks is going to provide and all of these other competitors because it is an extremely high quality company just based on their

success to date and their incredible growth and their incredible retention rates. But it needs to continue to be an incredible company for a long time for this to work. And I think when you're underwriting free cashflow in 2029, like this company has done in the past, you can take that with a large grain of salt, but a little bit less of a grain of salt with this company, just considering how visible their entire business is and how sticky it is. So bull case is that status quo kind of remains and that they remain the market share leader among disruptors and can continue to kind of, not cannibalize, but continue to take a lot more share of this market because that's needed.

I mean, when you have a $7 billion TAM, yes, it's growing at 20% year over year. So it's probably 10 billion right now. But I mean, so you have a $10 billion TAM today and a $60 billion company. you need to perform phenomenally to do well. And that's the bull case, but that's also the bear case of companies like Databricks coming in and enhancing competition, maybe weighing on margins or take rates. Yeah, exactly. And there hasn't been a lot of evidence of this to date, just because we've seen pretty solid margin expansion. They still have a ways to go, But that is a real possibility, especially when Databricks gets a billion or whatever

they're going to get on their balance sheet from this upcoming IPO in the next year or whenever. Yeah, for me, I think you have to get to at least $10 billion in revenue over the next five to seven years to make this a worthwhile investment. I think it's achievable, especially given the current growth rate and the forecasted revenue retention number from management. But yeah, I would say it's got to be $10 billion revenue, 20% to 30% free cashflow margins. And just to give some context on that, that would be $3 billion in free cashflow. If they're valued at 40 times free cashflow,

which I think is a fairly aggressive multiple to slap on it, that would be a $120 billion market cap that's almost a double from here i think it it's roughly a double from there um but that that's just to contextualize returns over the coming years what you have to get yeah it's a high multiple though yeah it is and i yeah but i don't think this is something that isn't growing and by that point so yeah that's the key is you have to expect it to grow and maybe 50 revenue growth for five years and at the end of it you also have to expect it to be growing still at 50 a year because you need to have that. You need the market to be optimistic

about the investment five years from now because if not, and it gets a market multiple, that growth from five, like the next few years needs to be very, very, very high. But if you do, I mean, Ryan outlined it. I think you can have a bull case

at these prices, but you have to be very confident in 50% plus growth for five plus years. All right. Fair case. Brad, what do you have? All set on mine. Oh yeah. Yeah. I just, yeah, I got the, the yin and yang. Yeah, exactly. All right, Ryan.

I don't know if there's that much business risk in order to make it for my bear case. Like I think the teams that are on this it's really crucial to their day-to-day operations and they're spending more and more money with it. I don't see them switching off just because it's so, so integral to their business. But I will say multiple compression is going to come. It has come. It's going to continue to. So you are fighting that. I know that's kind of, you're fighting that with every high growth investment, but I just have a hard time forecasting what cashflow looks like in a few years. So if it's even slightly underwhelming or growth doesn't look good, or God forbid, there was some competitor.

The stock's going to move all in revenue growth right now, right? yeah but i mean i'm talking like terminal cash flow whatever it is on year five for a company like this i feel like it's impossible to even yeah i agree which is why i kind of that's my bear case is that it feels like everyone's kind of going with a shot in the dark revenue growth um if that comes in under what everyone's expecting or or maybe there is this onslaught of competition there's going to be a ton of multiple compressions yeah that comes under my bull case, it's going to be valuation. And when I say valuation, really, it's pretty unique in the sense where revenue growth, the bear case is basically revenue growth decelerates a lot.

And that will either be from a limiting TAM. It's not as big as people think. I kind of doubt that one, but who knows? I'm not an expert in that field. And the other one is competition starts to slowly gain sales growth and ruins their unit economics or ability to acquire new customers. So we'll see. I think it's a pretty simple bear case, especially given that it trades at 50 times sales. But let's move into more or less interested, Brad, final thoughts today. Yeah. So in light of this recent market volatility, and I'm a growth investor, there have kind of been a few companies that I've placed on my shopping list that I'm very interested in owning at different prices if Mr. Market throws another fit, which is a real

possibility with all this stuff happening. And I think Snowflake is a company that I'm maybe going to consider adding to that list. There's way, way, way more work that I need to do to actually understand this industry enough to confidently invest in it. But just from what I've heard today, the most alarming thing to me is the multiple and the valuation. So when that's the case, it's generally a good hint to me to start following news flow and to see if that valuation ever comes in. Because there's a lot to like here, even if it does. I'm sorry, there's a lot to like here if it does come in a little bit, or if it grows into its shoes and kind of chops around for a year or two, a lot to like. But I think I'm adding it to that shopping list with

the caveat that I need to know it way better than I know it today in order to ever start a position. Yeah. Ryan? Less interested. From what I understand, the business seems pretty bulletproof, but this isn't my world of investments. And I know I use this cop-out all the time that it's outside my expertise if I have one, but- Several economies, right? Yeah. Enterprise software, I usually struggle with. This definitely fits into that. Yeah, I guess there's probably not much more to be said. It's not my world, so it's probably going to take me a while to get around to it. But it's always good to look at these just to learn. But do I understand the competitors at all? Not really. Yeah, Brad? Yeah, I just think, I mean, I started a position in Matt's group last month,

and that took me a few days to understand. And then just juxtaposing that with a trade desk or a CrowdStrike, which are two more enterprise software vendors, these take a long, long time to understand. So if you want to learn about this company, buckle up and be patient is the word of advice I would give. Yeah, there's some companies that take very little time to understand. There's some companies that take a long time. This is on the longer end of the spectrum. I'm going to go less interested mainly because IT and SaaS is not an industry. It's not in my circle of competence. It's not an industry I'm trying to get in my circle of competence right now. So that's really why I'm less interested. Obviously, the numbers look great from the SaaS software IT investors

out there that have basically all said great things about the business you know that's a great thing to hear as someone that doesn't isn't an expert there so that feels like i it's that makes me think it's a great business basically because i'm outsourcing it to other analysts but for me just less interested someone might make money on this but it's not going to be me yeah who knows so muji if you ever if you ever start a fund and and and own a snowflake in it maybe that's how i'll invest in Snowflake in the future. We'll make sure to link to his page on Snowflake. He has his

whole, some of them are paywall, some of them are not. Stock for next week, Brett. Yeah, so we're going to do something a little bit more understandable. I think it's going to be RH. The old company was Restoration Hardware. Should be a fun one. I don't know what they're doing.

It's a little more up my alley. Stores, and they're selling furniture, I think, for $1,000. So there we go. All right, that's going to do for this episode, give us a review on Spotify or iTunes. It takes you 10 seconds if you're in the app right now. So do that. Helps the show a lot. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. However, Ryan and I are general partners at Arch Capital, so clients may hold securities discussed in this podcast. Thank you

all for listening. We'll see you next time. you