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There’s No Need to Rush into the Snowflake IPO

SNOW stock has soared since going public, but at this point it's wise to let the stock settle down

So far, Snowflake (NYSE:SNOW) has done nothing but impress, at least as far as the equity markets go. The SNOW IPO (initial public offering) happened just last week, and already Snowflake stock has nearly doubled.

The Snowflake logo on a company office in Silicon Valley, California. (SNOW IPO)
Source: Sundry Photography / Shutterstock.com

Of course, all of the gains and then some happened on the first day. The “cloud data warehousing” company priced its IPO at $120, up from a prior range of $75 to $85. SNOW stock closed at $254 and has since pulled back about 14%.

Still, that performance is impressive. It’s not as if the SNOW IPO slipped under the radar. It was the biggest software IPO ever, raising over $3 billion. Big-name investors took stakes in the company concurrent with the offering.

Meanwhile, broad market indices are slipping, with high-valuation growth stocks under pressure. Yet Snowflake stock has mostly dodged that pressure and kept most of its spectacular first-day gains.

Even with some slippage on Wednesday, there are reasons to see the stock holding this level. There’s even a case for more upside following the big IPO jump. But at this point, in this market, I think investors would do well to be patient. For now, at least, the SNOW IPO is for traders, not investors.

Why the SNOW IPO Is So Popular

To be sure, the demand for the SNOW IPO isn’t necessarily a surprise. Snowflake offers one of the better growth stories out there.

After all, I’ve recommended other plays on “Big Data” on multiple occasions. And that’s because Big Data is a megatrend. Artificial intelligence, 5G wireless, and Internet of Things are just a few of the innovations that will create exponential amounts of data — and more need to properly analyze that data.

Snowflake can go toe-to-toe with any Big Data play. The Snowflake platform lets companies combine every type of data into one single dataset. That in turn allows for better analytics, which is key to competing in the tech-enabled world.

Meanwhile, that platform was built on the ‘cloud’ from the jump. That drives better performance, but also keeps Snowflake from having to make the difficult pivot from on-premise that has tripped up other software plays.

Again, as far as growth stories go, Snowflake’s is one of the best out there. And that story ticks all the boxes for what growth investors are looking for at the moment.

The Fundamentals

So do the fundamentals. Snowflake’s revenue is growing at an exponential rate.

This is a company that only was founded in 2012. Wall Street expects revenue next year to clear $1 billion. Zero to a billion-plus in sales in less than a decade is a phenomenal and rare accomplishment. It speaks to the attractiveness of the Snowflake product, particularly in such a crowded space.

To be sure, Snowflake is highly unlikely to be profitable next year. But as I’ve argued repeatedly in recent years, that’s fine. In fact, it’s wise.

With that kind of revenue profile, Snowflake shouldn’t be running its business for near-term profitability. It should be maximizing long-term earnings by picking up as many customers as possible.

After all, Snowflake’s history suggests those customers won’t go anywhere once acquired. And once acquired, they will be a source of hugely profitable revenue.

The Concerns

What’s not to like? For one, after the huge IPO pop, the valuation. Snowflake, almost incredibly, has a market capitalization over $60 billion. That’s about 60x next year’s revenue.

By one analyst’s reckoning, that’s the highest multiple in all of tech — and by a good amount. Even with revenue likely to be up close to 100% next year, SNOW looks markedly expensive.

There’s also the nature of post-IPO trading. Supply is limited; demand is not. We will see new shares hit the market in the coming months as lock-up provisions expire. That usually (though not always) leads to volatility.

At the least, long-term investors could reasonably believe that a better price might be on offer at some point. After all, there’s some obvious nervousness in the market right now about valuations in tech.

I don’t necessarily share those concerns as the most expensive stocks in this market generally have enormous long-term opportunities. But if the tech sell-off accelerates, SNOW is unlikely to be immune.

Personally, I’d like to see the stock get cheaper — because I love the story. I’m just not quite convinced that the price is right or, at the least, that it won’t get better.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/09/no-need-rush-snow-ipo/.

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