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The Future of Big Data

April 21, 2024
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Wiko Steyn
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Wiko Steyn

Unicorn Portfolio Update 7: #10 of 20 stocks added.

 

Intro to Databases and Snowflake

Data has been described as the single most valuable commodity in the modern world. Incredibly, we produce an estimated 2,500,000,000,000,000,000 (2.5 quintillion) bytes of data every single day and this number is still growing rapidly. 

Databases bring order to this vast amount of data, in the same way, you bring order to your physical documents by organising them in labelled folders. Thankfully databases are a lot more efficient than humans at storing, retrieving, modifying, deleting and any other data-processing operation. And it has to be since it is handling a lot more data than your typical file cabinet. 

Databases can be defined by many different categories like sequential or relational, structured or unstructured, distributed or centralised, SQL or NoSQL, object-oriented and hierarchical but this article will be 100 pages long before we are done describing and comparing each, instead we will only focus on two types, transactional vs analytical. Snowflake is raking in a piled of money by excelling at the latter, so what is the difference between these two?

Transactional databases are all around us, almost every app you use is based on this model. It is essentially what allows developers to store usernames, email addresses, options, profiles and anything else that gets customised. Large apps or websites need to be able to handle thousands of these transactions every second. Therefore these databases were optimized to add or update rows very quickly. People soon realised there is tremendous value in all this data that we are generating. There was a problem though, the queries used to extract valuable insight from the data were not really compatible with the way transactional databases were designed.

Enter the analytical database. These were optimised for analytical queries and soon we were storing orders of magnitude more data in them, tracking views, likes, engagements, sales performance and many other business metrics. Understanding each database's role makes it easier to differentiate between the two. Transactional handles the day-to-day running of the business and analytical provides insight into the data supporting business intelligence.

 

Why we love Snowflake? 

Conviction (9/10)  X  Upside Potential (8/10)   

Snowflake is one of the leaders in analytical databases. More importantly, it's much more than just a database it's a platform delivered as a service that requires no infrastructure management from its users. This service is often referred to as a fully managed data warehouse. All the usual hassles like allocating additional servers, managing permissions, networking and scaling are no longer the user's responsibility. Users simply dump their data into Snowflake and they are able to query it very quickly, thanks to a highly optimised query engine. Snowflake is an all-encompassing, cloud-native solution for all your data needs. Their platform allows users to aggregate and consolidate data into a single source, which can then be used to run analytic queries, facilitate AI and ML insights, develop custom-built applications and share data across organisations. All of this is integrated into a beautiful UI and user-friendly UX. Snowflake is also cloud-agnostic, which is great for customers with cross-platform data like AWS, Azure or Google Cloud. 

The TAM for fully managed data warehouses is growing exponentially and Snowflake recently updated their expected TAM for 2026 to $248B. Snowflake also has a very prestigious investor since pre-IPO. The Oracle of Omaha (Warren Buffett) made a very rare $730M bet on tech when Berkshire Hathaway invested in Snowflake. The good news for new investors is that they can now acquire Snowflake shares at the roughly same price as Buffet did after the multiple contractions during this market crash. This along with a great product, an excellent management team (more on this later in the article) and strong secular tailwinds gives us a great conviction in holding Snowflake for the next 5 to 10 years.

 

Moat (7/10)

  • This company has a strong network effect, which is clearly shown by the astonishingly high Dollar-Based Net Retention (DBNR) of 178%.
  • Like most Platform as a Service (PaaS) companies, they benefit from high switching costs and customers are usually locked in.
  • We do have to give it some credit for brand recognition since this name has become quite popular in the data universe.

  

Management (8/10)

Intriguingly, Snowflakes success began with the three co-founders who are still at the company, but unlike the founder-led culture that dominates most of the tech industry, the company really took of with three external CEOs. First Spieser, then Muglia, and finally Slootman have guided the company to a $1B annual revenue, and rapid growth. 

This pattern of rapid CEO turnover rarely screams success story but it seems like Snowflake is the exception. Slootman might be familiar to some, he served as the CEO of ServiceNow a highly successful workflow company. Essentially all you need to know is that Slootman is the man you want at the helm of a cloud-based software company.

The company gets great reviews on Glassdoor and insiders still have a lot of skin in the game.

 

Financials (6/10)

  • The company is still in hyper-growth mode and recently became Free Cash Flow positive. 
  • The Net Income is still negative and the trend is going down, which is not great to see. This is mostly due to high Customer Acquisition Costs (CAC).
  • Gross Margin sits at a mediocre 64%. We do expect gross margins to improve in the future. 
  • The Balance Sheet is exceptional with $3.8B in cash and debt of only $206M. 


Risks (5/10)

  • Operating in a hot sector automatically attracts a lot of competition.
  • A completely new database technology might replace the current leaders.
  • Snowflake's biggest risk may be to face the coming storm from big tech. Amazon, Microsoft, and Google all have products in the space and with limited enduring defensibility, the company could see its position pressured.
  • Stock-based compensation (SBC) is very high creating significant dilution.


Conclusion

Big Data and Artificial Intelligence will fundamentally change the organisational model of most businesses. Snowflake has positioned itself to benefit greatly as long as they can remain one of the leaders in this space. Snowflake is not the usual fit for the Unicorn Portfolio, since it is already a large-cap company with a valuation of over $30 Billion. Yet, the company is still growing at more than 50% and has transformative possibilities.

 

Portfolio Updates Summary

  • Buy $250 SNOW at $112.94
  • Buy $250 PGNY at $26.25
  • Buy $250 NTLA at $37.78


 

Disclosure

This is not financial advice and is only based on the author's opinion. This is not buy or sell recommendations of any stock.  The $10K is not real money and only a demonstration of a typical portfolio. The Unicorn Portfolio is a high-risk portfolio and should always remain a small allocation of your overall assets. This is an actively managed portfolio where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investors personal responsibility to always remain tax compliant.


 


 


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