At the close of its fiscal second quarter of 2025 (ended July 31), data company Snowflake(NYSE: SNOW) had more than $3.2 billion in cash, cash equivalents, and short-term investments. That's a huge cash position. But management apparently wanted an even bigger bank account.
Last month, Snowflake's management announced a deal to raise between $2 billion and $2.3 billion. And at first glance, the move looks like a no-brainer. The company is getting this enormous amount of money at 0% interest. What's not to like?
It's true that the rate is great for Snowflake. But there's no such thing as a free lunch. It turns out that the company is paying for this deal in other ways. And I believe shareholders should be aware of the terms here.
What's not to like with Snowflake's $2 billion?
Snowflake is raising money with convertible senior notes. The investors funding the deal are giving the company $2 billion. But what do they get in return, considering the 0% interest rate? Well, these investors are foregoing the interest-income opportunity in exchange for shares of Snowflake itself.
Snowflake's new notes come due in 2027 and 2029. And they have a conversion price of $157.50 per share. This is the first concern for shareholders here.
Snowflake stock trades around $124 per share, as of this writing. Therefore, it only needs to go up 27% total in the next three years for the 2027 notes to convert -- just 8% per year. And the stock has to go up less than 5% per year for the 2029 notes to convert.
In other words, Snowflake could perform worse than the average for the S&P 500 and the notes would still convert. And if the notes convert, new shares of Snowflake are issued, which dilutes existing shareholders.
Now, Snowflake's management knows that this financing arrangement could dilute shareholders, which is why it's making anti-dilution moves. It has an option trade in place that will counteract the notes if they convert. But this option trade will cost about $400 million.
In other words, Snowflake is using about 20% of the money it's getting to counteract the potential for dilution to shareholders.
Why go to all of this trouble?
To summarize the situation, Snowflake is raising money by issuing convertible notes. And just modest upside for the stock will result in new shares being issued, which will cause management to use a lot of money to offset the negative effects of dilution. But why is it doing all of this?
The official filings for financing arrangements such as this disclose management's intentions. And Snowflake's management says it couldbuy back stock or acquire other businesses. But it goes on to say it doesn't have any concrete plans. For now, it plans to simply use the money for "general" purposes.
I find this plan shocking. After all, Snowflake already had plenty of cash. Moreover, the company generates positive free cash flow.
SNOW Free Cash Flow data by YCharts
In other words, Snowflake seemingly has more than enough resources to satisfy its needs for any general corporate purposes. Raising more cash without a clear purpose is consequently a head-scratcher.
It's tempting to think that Snowflake is raising money because it believes its expenses are about to soar. But management recently said that it only plans to spend on artificial intelligence (AI) if it actually boosts the business. This commentary regarding AI suggests that management isn't prepping for out-of-control expenses.
In conclusion, Snowflake is raising money and it's unclear why. The company already had ample resources and, so far, management has only said it needs the money for general purposes.
To be clear, there are plenty of other things for investors to consider with Snowflake's business when considering this stock. But I believe that investors should await clarity from management regarding its intentions with its fresh $2 billion. That's a lot of money and it's unlikely that it was raised for no reason at all.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Snowflake. The Motley Fool has a disclosure policy.
