Snowflake (NYSE:SNOW) is one of many initial public offerings this year that fared well. This software application firm arguably performed the best from a valuation and market capitalization perspective. Despite falling 28.8% from its 52-week high after the IPO, the company is still worth $62.2 billion.
When investors learned that Berkshire Hathaway (NYSE:BRK.B) backed Snowflake, it helped generate euphoric buying that sent the stock to over $270. Berkshire disclosed that it added to its position and owned 2.15% of the company, or 6.12 million shares.
If the technology sector is amid a light correction, when should investors buy this stock?
SNOW Stock Initial Catalyst May Fade
Berkshire’s investment in Snowflake is a near-term catalyst that ensured the stock’s IPO success out of the gate. But investors should not assume the great Warren Buffett authorized the investment. Charlie Munger may not have, either. Ted Weschler or Todd Combs manages a portion of Berkshire and might have decided on the investment. Once markets realize this, the stock may fade from here and trade on fundamentals.
Snowflake is a data management solution for the cloud. It built a cloud data warehouse in 2014, offered a cloud data platform for workload and user expansion in 2019, and is a data cloud provider for content vector and network effects in 2020. In the second quarter, revenue grew by 121%. Net retention topped 158% as it ended the quarter with 3,117 customers.
$133 million in revenue in Q2/2021 caps its 121% year-over-year growth. Despite this strength, net loss topped $178 million for the fiscal year ended Jan. 31, 2019. That followed with a $348.5 million loss for the year ended Jan. 31, 2020.
The increasing losses suggest that as its business gets larger, losses mount. Yet Snowflake operates on customer credits. This is cashed in if a customer uses resources. Customers may choose from four editions: Standard, Enterprise, Business Critical, and Virtual Private.
Increasing customer growth suggests that the company’s revenue will keep increasing in the triple-digit percent range. Its Cloud Data Platform gives it an addressable market of $81 billion (per SEC filing). According to IDC, its Analytics Data Management and Integration Platforms and Business Intelligence and Analytics Tools have a combined value of $56 billion this year. By 2023, the market value is $84 billion.
Snowflake hinted it will continue losing money as it invests significantly to grow both its domestic and international markets. Its research and development, sales and marketing, and partner ecosystem investments will drive its growth. As its platform advances, the company’s appeal to customers will grow.
At its current valuation of 154 times sales, markets are betting that newly acquired customers will drive its growth. Furthermore, its existing customer base will increase its usage of its Data Cloud. Expanding its global footprint and data sharing will accelerate user activity. After the stock dips to a $62.2 billion market cap, the stock may not seem so expensive.
Investors may consider Datadog (NASDAQ:DDOG) instead. It trades at half the market capitalization even though the stock soared by 14% in the last week. Datadog launched Error Tracker in August. Its Continuous Profile product is a low-overhead app code profiler. Compliance Monitoring, which it launched on Aug. 11, is a tool that facilitates compliance of a production environment. It also automates “audit evidence collection, and catch misconfigurations that leave your organization vulnerable to attacks.”
Salesforce (NYSE:CRM), which always trades at unfavorable valuations, is valued at a $220.7 billion market capitalization. The stock is off 12.9% from 52-week highs. The company has a 9.9% passive stake (4.25 million shares) in Snowflake.
Snowflake is a post-IPO stock whose volatility may increase as buyers and sellers decide on its price. Once that settles, technology investors should take a look at this software company.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.