Snowflake, Inc. (NYSE:SNOW) is up significantly from its IPO price last week but is way down from its first trades. That may portent how the SNOW IPO affects the way the stock fares over the next several months as the froth in the stock burns off.
The SNOW IPO opened Sept. 16 at $120 and it closed its first day at $253.93, up 112%. Today it will open around $250.
SNOW stock likely has more to fall from here. Only the most risk-averse or those willing to average cost in their holding should own it.
A Closer Look at the SNOW IPO
The problem is there is no margin of safety in Snowflake’s stock price. Every analyst that I have read says that the stock price is grossly overvalued.
For example, Barron’s wrote recently that Srini Nandury, of Summit Insights Group, a research firm, argues that it is “the most expensive name in all tech.” It trades at 76 times the next 12 months sales, which is way higher than its peers. His price target is $175.00
Moreover, although he projects sales growth of 117% for its FY 2020 ending January 2021, it slows to just 40% in 2025.
It’s not like the company has a unique product with its data storage and data query services in the cloud. It competes with major companies like Oracle (NASDAQ:ORCL), Teradata (NYSE:TDC), SAP (NYSE:SAP), and IBM (NYSE:IBM), to name a few.
In addition, a Seeking Alpha author, Lukas Wolgram, points out that the company has a short lock-up period of just 91 days. Most employees can sell up to 25% of their holdings after Dec. 16. That means the stock could face a big drown draft.
Another reason that most analysts said contributed to the huge stock upsurge was the limited number of shares available for sale. In other words, the float is very low for a tech company with a $63 billion market capitalization. Demand outpaced supply of shares available to buy.
Mixed-Bag After the SNOW IPO
One Seeking Alpha commentator said the company’s billing growth rates make the stock worthwhile if it sells off. Revenues were up over 2.3 times in the first half of the year. Run rate revenue is over $500 million.
The problem is that analysts polled by Seeking Alpha still predict just $574.3 million for the year ending Jan. 2020. That puts the stock, at a $63.3 billion market cap, over 112 times revenue.
And FY 2021 revenue is forecast at $1.09 billion, almost double 2020. But it still means the stock trades at 59 times forecast sales. That is a ratio that would be high even if were a price-to-earnings ratio, not price-to-sales.
As the Summit Insights Group analyst Nandury writes, the company has to perform flawlessly to grow into its valuation.
Another author, Eric Savitz, of Barron’s, says that the Snowflake IPO shows the market is “enamored with the cloud” and “desperate for ideas.” He says that “valuation is no barrier.” He points out that the investment in Snowflake by Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) helped spike the stock price.
What To Do With SNOW Stock
The most logical thing to do seems to be to wait for the stock to sell off in anticipation of the lock-up period expiring in early December. That will likely provide some point of entry into the company at a lower price.
However, value investors will want to see evidence of profitability before investing in a company. So far, Snowflake won’t produce profits for a number of years. Therefore value investors will likely be more patient and wait for a chance to get a bargain element or a margin of safety. So far, there is none of that in SNOW stock.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
