Snowflake at a Crossroads: will Frank Slootman return as the CEO?
Unhappiness all around as short sellers circle the pond
In this report, we discuss Snowflake after engaging with several top executives from the company, its competitors, and key investors. Our main conclusions from these discussions are:
The company's fundamentals are considered weak, potentially valuing it at half or less of its current market price due to slowing growth, low profit margins, and a vague strategy.
Several customers looking to cut contracts by 20-30% by reducing usage or additional discounts to save on the “Snowflake tax”
The board is pressing for Slootman's return. Slootman may be the only friend Sridhar has in this board.
Sridhar may not be the right fit for the leadership role; he seems to require guidance rather than providing it.
Short sellers are eyeing the situation but remain cautious, fearing substantial losses if Slootman were to return.
From a trailblazing startup to a cloud computing titan, Snowflake Inc. has experienced a meteoric rise since its inception in 2012. Lauded for its innovative technology that separates data storage from computing, Snowflake revolutionized the data management landscape, enabling dynamic resource allocation that transformed how enterprises handle vast data volumes. However, amidst intensifying competition, worsening growth and margins, a series of high-profile security lapses, and significant leadership changes, Snowflake finds itself at a critical juncture.
We consulted with numerous key investors and insiders to form a picture of a company beset by aggressive and focused competitors, yet without a clear direction. An activist investor, after reviewing the financials and meeting with Slootman, expressed concerns, deciding against investing due to figures that were perceived as worse than market expectations. This long only investor shared their assessment as below:
We have reviewed the financials, consulted with Sridhar—an excellent executive—and Slootman—a standup guy. Slootman was a visionary, and we profited greatly under his leadership. Sridhar is like a soldier; he requires a general to be effective. Our comfort level with investing is low due to irreparable issues at Snowflake. The company's valuation seems to be approximately half of its current trading price. Conversations with various customers reveal a trend towards migrating their data away from Snowflake. The Cortex strategy is a complete head-scratcher, and Sridhar's purchase of GPUs from Jensen is puzzling. It's unclear why he isn't opting for a wrapper around Azure, which is a common practice among others. AI will have winners and losers; we think Snowflake will come out among the latter.
The recent failure of Snowflake to acquire AI startup Reka, coupled with its unsuccessful attempt to purchase Tabular, has cast doubt on the company's strategy under its new leadership. An anonymous analyst from a major bank commented, "Investors are seeking tangible results from AI investments that justify the expenses and are in line with the updated growth strategies. As revealed during the investor day, they are only witnessing the costs, not the growth."
Amidst these challenges, a source acquainted with Slootman's perspective disclosed, "He is displeased with Sridhar, and the board has been attempting to persuade Slootman to return." Simultaneously, discussions with analysts and industry experts suggest that Snowflake might be a company that has missed the train. A prominent hedge fund, recognized for short-selling, is currently assessing whether to take a position. "Considering the fundamentals, I'm inclined to sell tomorrow; however, if Slootman comes back, the value might jump to 200 in a single day, making me look foolish," the investor commented. They added, "But if the board keeps supporting Sridhar and his GPU purchases, I'll stick with it down to 30 dollars." It's worth mentioning that the stock was trading just over $128 at the time of this report.
The Dawn of Snowflake and Rapid Ascent
Snowflake's journey began with its founders, Benoit Dageville, Thierry Cruanes, and Marcin Zukowski, whose vision was to create a cloud-native data platform that provided unprecedented scalability and efficiency. This vision quickly materialized into substantial growth, with revenue skyrocketing by 174% in fiscal 2020, culminating in a blockbuster IPO that raised $3.4 billion and valued the company at $33 billion. The founders' expertise in data warehousing and their recognition of the growing demand for cloud-based solutions laid the foundation for Snowflake's success. By leveraging the scalability and elasticity of the cloud, Snowflake's platform offered a seamless and cost-effective way for businesses to manage and analyze vast amounts of data.
Snowflake's innovative approach to data management resonated with businesses across various industries, leading to rapid adoption and market disruption. The company's ability to handle structured and semi-structured data, coupled with its user-friendly interface and robust security features, made it an attractive choice for organizations seeking to unlock insights from their data. The platform's unique architecture, which separates compute resources from storage, allowed customers to scale their data operations seamlessly, without the limitations and complexities associated with traditional on-premises data warehouses. This flexibility and cost-effectiveness drove Snowflake's meteoric growth, attracting a diverse customer base ranging from startups to large enterprises.
Snowflake's remarkable growth trajectory culminated in a highly anticipated initial public offering (IPO) in September 2020. The company's IPO was a resounding success, raising $3.4 billion and valuing the company at an impressive $33 billion. This milestone not only solidified Snowflake's position as a leading player in the data management space but also underscored the market's confidence in the company's long-term potential.
Slootman's Stewardship and the Pursuit of Market Dominance
When Frank Slootman took the reins at Snowflake in 2019, he was stepping into a role that would not only define his career but also reshape an entire industry. Slootman, already known for his transformative leadership at ServiceNow and Data Domain, brought a relentless drive to Snowflake, a cloud data warehousing company that, under his guidance, would grow to become one of the most talked-about tech IPOs of the decade.
Under Slootman's leadership, Snowflake aggressively expanded its market footprint, securing influential clients such as DoorDash, Roku, and Morgan Stanley. These high-profile acquisitions were not just logos on a sales deck; they were testaments to Snowflake's growing dominance in the cloud data sector. "Frank's relentless focus on market execution helped us attract some of the biggest names in various industries," noted a former Snowflake executive, reflecting on Slootman's ability to scale operations and drive unprecedented growth.
However, Slootman’s tenure was characterized not just by rapid growth but also by the significant challenges that came with it. His approach, often described as no-nonsense and unapologetic, earned him a reputation as a titan of the tech industry, a leader whose strategies and decisions were as polarizing as they were effective. "Slootman's leadership style is a double-edged sword," remarked an industry analyst. "On one hand, his approach significantly accelerated Snowflake's growth and market presence. On the other, it introduced a set of challenges that the company is still navigating."
Indeed, Slootman’s strategies led Snowflake to a successful public offering in September 2020, amidst the unprecedented backdrop of a global pandemic. The IPO, initially priced at $120 per share, soared to over $300 on its first day of trading, propelling Snowflake to a market valuation close to $70 billion. This virtual roadshow, which replaced the traditional in-person meet-and-greets, was a gamble that paid off handsomely. Slootman himself found the virtual format invigorating, "I absolutely loved it," he confessed, after engaging with more than 1,000 stakeholders via Zoom, turning what could have been a logistical nightmare into a showcase of Snowflake’s resilience and market appeal.
The IPO was not just a financial triumph but also a validation of Slootman's belief in Snowflake’s potential. "The issue was not ‘Do I like the company?’ The issue was ‘How many shares do I get?’" Slootman recalled, highlighting the overwhelming demand for Snowflake shares during the IPO.
However, the rapid growth and the circumstances of the IPO under Slootman's watch have left Snowflake facing a complex future. His successor, Sridhar Ramaswamy, inherits a company with a formidable market presence but also significant challenges that stem from the very strategies that fueled its rise. Ramaswamy, taking over in a time of global uncertainty, must navigate not only the external pressures of an increasingly competitive tech landscape but also internal expectations set during Slootman's impactful yet controversial tenure.
Leadership Transition and Strategic Pivot
"Slootman's departure signifies the end of an era for Snowflake, paving the way for a new chapter of potential growth and innovation," noted a tech industry commentator. This shift occurs as Snowflake's diversity and inclusion practices, along with its corporate culture, face scrutiny, partly due to Slootman's vocal opinions and leadership approach.
As Ramaswamy assumes his new position, the industry observes with great interest. Will he continue the robust growth strategy of his predecessor, or will he guide Snowflake on a more measured course, addressing the opportunities and challenges left by a renowned leader? An industry insider remarked, "We have exchanged Bono for an accountant," a sentiment that echoed through the market as Snowflake's shares fell 20% following the announcement.
The abrupt exit of CEO Frank Slootman in late February 2024 has heightened the uncertainty. His successor, Sridhar Ramaswamy, a former Google executive and the mind behind the AI-driven search engine Neeva, has shifted focus towards integrating AI more deeply into Snowflake's offerings. Despite rebranding as the "AI Data Cloud" and forming key partnerships, such as with Nvidia, Ramaswamy's strategies have yet to assuage investor concerns.
Deceleration and Intensified Competition
Despite its initial success, Snowflake's remarkable growth has started to slow down. By fiscal 2024, the growth rate has decreased to 36%, with forecasts indicating a further slowdown. This deceleration is intensified by stiff competition from established rivals like Databricks and tech giants such as Google, Amazon, and Microsoft, all competing for leadership in the cloud data market. Even with significant deals worth $100 million, the decline is somewhat indicative of Snowflake's previous rapid expansion, which is now stabilizing at around 30%.
The market's concern, however, lies not only in the decelerating growth but also in Snowflake's persistent struggle to convert this growth into profits, as the company's gross margins continue to shrink despite increasing revenues. This raises the question: Is Snowflake destined to be one of those companies that never truly profits?
Recently, Snowflake, the data cloud company, announced its earnings for the first quarter of fiscal year 2025. The company reported a robust performance with a 34% increase in year-over-year revenue, totaling $789.6 million. Although the growth was impressive, investors continued to express concerns about profitability, noting a 42% increase in operating losses and a gross profit margin of only 72%, compared to its peers who typically achieve gross margins in the high 70s.
Investors who wagered on Snowflake's 100% growth during the pandemic are now disillusioned, with the stock plummeting another 20% since the announcement of these results. The company's valuation is now less than half of what it was during the peak days under Slootman's leadership. The AI investments, which appear to lack tangible benefits, have particularly alarmed investors. Unlike Slootman, who might have been given the benefit of the doubt, Sridhar is not afforded such leniency. In a recent earnings call, Snowflake's management described its largest customers as a "growth headwind," observing that these clients prefer to stick to their contractual spending limits rather than exceed them. This pattern of curtailed spending by major companies is a response to the general overexpansion in the tech sector.
Security Concerns Take Center Stage
Complicating matters were significant security breaches that cast doubts over Snowflake's robustness in safeguarding customer data. Incidents involving major clients like Ticketmaster and Pure Storage underscored vulnerabilities, prompting critiques about Snowflake's optional approach to multi-factor authentication (MFA). A senior official from cybersecurity firm Mandiant highlighted, "While Snowflake's platform is fundamentally secure, these breaches demonstrate the necessity for stringent security measures like MFA."
Financial Performance and Market Response
After discussions with various customers, executives, and investors, we have evaluated Snowflake's financial health. Our findings paint a troubling picture: customers are being retained through significant discounts, and some large clients are contemplating cutting their contracts by 20-30% to mitigate the "Snowflake tax." For those unfamiliar—though our readership typically is—Snowflake's data storage model incurs substantial added costs and results in vendor lock-in. This so-called "Snowflake tax" arises from its proprietary Hybrid Columnar Cloud Storage format, which complicates and increases the expense of exporting data for use with other tools and platforms. Customers incur separate charges for data storage, calculated per credit, per terabyte, per day, which can be exorbitant relative to more affordable cloud object stores. Moreover, Snowflake imposes data transfer fees for both importing and exporting data, significantly inflating costs for large data volumes. The amalgamation of proprietary formats, storage and transfer fees, and limited data portability leads to significant vendor lock-in once enterprises have invested heavily in storing data on Snowflake's platform. Despite its capabilities, the "Snowflake tax" escalates expenses and has attracted criticism for the company's perceived exploitation of customer lock-in via its data storage practices. In light of current economic conditions and the drive to allocate savings towards AI, numerous customers are considering transferring their data away from Snowflake.
A major consumer product company plans to cut its Snowflake expenses by up to 30% in 2025. "Previously, we stored a significant amount of our work data on Snowflake, allowing our analysts to conduct analyses directly. However, after reviewing our usage, we found that only 20% of the data had been accessed in the past six months." Similar sentiments have been echoed by numerous customers across the automotive, retail, and high-tech industries. The prevailing view is that the value derived from the expenditure is not justifying the cost.
An investor, who divested after Slootman's resignation, commented, "Slootman could retain customers, but Sridhar can't sell a product worth 100 for 150. We think the company will continue to lose ground as margin pressures increase." Generally, there was agreement that despite a significant drop, Snowflake is still trading at an 80-100% premium over its actual value. An investor specializing in distressed assets indicated they might be looking at Snowflake in the next year or two.
AI Investments and the Road Ahead
Despite challenges, Ramaswamy remains committed to AI, believing it will unlock new capabilities in data security, query optimization, and insights extraction. However, with operating margins at -36% in fiscal 2024 amid soaring costs, the financial viability of these AI ventures is under scrutiny. Sridhar, who after Neeva failure has a chip on his shoulder is desperately looking for a W, but he may be coming up against a familiar set of foes.
Snowflake stands at a pivotal point. The company must balance innovation with fiscal responsibility and robust security to restore and maintain market confidence. The coming years will be crucial in determining whether Snowflake can navigate these complex challenges and redefine its growth trajectory or if it will need to temper its ambitions in a rapidly evolving market landscape.
"As Snowflake contends with major industry challenges, its adaptability will serve as a crucial test for both the company and Sridhar. I am confident he will commit fully," remarked a senior Google executive who has worked with Sridhar in the past and regards himself as a fan.
Our research indicates that past achievements may not be sufficient. As Snowflake has been passed over by both long-term and activist investors, we believe it will face ongoing challenges, not only as a stock but also as an enterprise.