Snowflake’s relationship with Amazon stands as a big risk to investors amid IPO

As Snowflake warms up to become one of the biggest tech IPOs in the year, concerns rise among investors about the company’s complicated relationship with Amazon Web Services (AWS).

Snowflake’s stock market debut is getting much attention on Wall Street as investors scarcely ever see companies with nearly $500 million in annualized revenue and still doubles each year. However, some investors consider this investment as one with many risks.

The major risk is connected to Snowflake’s dependence on Amazon Web Services to sell its database in the cloud. The company has spent $1.2 billion on AWS technology over the past five years. While Snowflake battles with the risk of continuing to stick to AWS, Amazon Web Services is currently taking effective steps towards investing in a top competitor, Redshift.

AWS remains Snowflake’s major provider of cloud services. However, to reduce its reliance on AWS, Snowflake also uses cloud services from Google and Microsoft. This remains a concern to investors as Amazon is known for using pricing power in its enterprise businesses and dominant consumer to beat its competition.

Snowflake’s deal with AWS is quite complicated. The company is expected to spend $115 million on cloud infrastructure in its first year. By 2025, Snowflake would have spent $350 million, which means that the company’s sales will have to grow faster than its cloud expenses to boost its gross margin.

Snowflake said in its prospectus that “cost of product revenue” accounts for 94% of its total cost sales, with a large percent of it going to Amazon.

“The relationships with the public cloud companies is one of frequent inquiry, said Frank Slootman, Snowflake CEO, in a recorded presentation for investors. “We are becoming large customers and consumers of public cloud capacity, as well as partners and competitors, all at once. It can be frustrating, sometimes even bewildering, from one day to the next. But we are now trending better with all three.”

Snowflake’s stock market debut is attracting big investors including Berkshire Hathaway and Salesforce. The company priced its shares at $120, on Tuesday compared to the $100 to $110 range it estimated on Monday. If the company debuts at $120 per share, its valuation will be $33.3 billion.

Snowflake’s customers and consumers

Snowflake provides data storage and analysis tools services to various companies including Adobe, Capital One, DoorDash, and McKesson, among others. Since the company’s founding, Snowflake has provided exclusive public cloud services, allowing customers to easily access, add, or delete data from anywhere.