This is the main competitive advantage of Snowflake

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Cloud-based data warehouse business Snowflake (NYSE: SNOW) was the hottest IPO of the year and a very popular buy among hedge funds in the third quarter. When I say “hot”, that’s actually an understatement. After an initial price of $ 80, demand was so high that the pre-trade stock price rose to $ 120. By the time the stocks hit the market, they were 100% higher than even that nosebleed number.

As of November 23, Snowflake held those gains, with stocks trading at around $ 270 per share, a market cap of $ 74 billion, and a price-to-sell ratio of 142. That’s even more than the most expensive software. – stocks of services. What could possibly justify this?

Snowflake has many strengths, but funds willing to pay for stocks today probably recognize this key competitive advantage.

Snowflake benefits from network effects and high switching costs. Image source: Getty Images.

Snowflake data exchange

Snowflake’s cloud-native data platform consists of several products, including the Core Data Warehouse, Snowflake’s first product introduced in 2014. Snowflake then extended its capabilities to cloud data lakes, to the data engineering, to data science, to a data application feeder and data exchange. .

Many investors recognize Snowflake’s first-mover advantage. It is a pure cloud-based data warehouse that runs on all three major public clouds, offering a usage-based business model and a unique architecture that separates storage from IT capabilities. However, it’s data exchange, introduced in 2019, that CEO Frank Slootman calls “the most differentiating and strategic thing we do.”

Snowflake’s data sharing architecture doesn’t just work within a single organization. Data exchange also allows organizations to share data with other companies or monetize the data by uploading it to the Snowflake public marketplace. This works as long as all parties are, of course, customers of Snowflake.

Use case

“Once the data is somewhere in Snowflake, it becomes easily accessible to anyone inside Snowflake, across clouds and across geographies,” Slootman explains in this instructional video. This is even more impressive when you consider that sharing data doesn’t necessarily mean giving up physical control over it, as multiple parties can access the same copy in one place.

In the video above, Snowflake describes how the exchange has greatly benefited all parties following COVID-19 cases. Hospital systems with different technological architectures can flag cases and intensive care beds so that government authorities can know when cases may overwhelm local hospitals. While COVID-19 gives perhaps the most obvious use case for business-to-business data sharing, we can also see how this could benefit businesses across a supply chain. For example, a machinery supplier to an industrial company could follow a customer’s sales data in real time and then adjust their own production accordingly.

Two powerful moats at once

The exchange offers a powerful network effect for Snowflake that we normally see in early ecommerce and social media platforms. Once such a platform attracts a critical mass of users, it becomes valuable, which then attracts more users or vendors to the platform, which in turn attracts even more customers, and so right now. By implementing this fast and easy data exchange platform, Snowflake seems to have this first-mover status in the data cloud.

While well-funded competitors may eventually catch up with Snowflake’s technology, the data market still gives existing and potential customers reasons to prefer Snowflake over its competitors.

This network effect exacerbates the high switching costs enjoyed by most enterprise software platforms. High change costs mean that once an entire organization is formed on a certain software platform or all of an enterprise’s data resides with one data provider, it becomes expensive, difficult and risky to extract. this data and pass to another provider.

This “double economic moat“Combined with a long track of growth, this is probably what excited investors so much.

My mind could be changed

When Snowflake hit the market, it looked ridiculously expensive. There is still a lot of good news already incorporated. However, with a better understanding of these two powerful benefits, it’s definitely on my radar when going backwards. If you firmly believe in the business growth prospects, and if you have a long enough time horizon, buying stocks with a small allocation today might not hurt, even at these breathtaking prices.

Investors will have more information when Snowflake first releases its results as a public company on December 2.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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