Snowflake Is a Great Company, But Avoid SNOW Shares for Now

Snowflake (NYSE:SNOW) stock has all the elements needed to become a huge winner over the longer term. Specifically, the company operates in a hot sector, appears to have great technology that will tremendously help its customers, and has a wonderful CEO.

Snowflake IPO on the NYSE
Source: rblfmr / Shutterstock.com

Further, the company is growing at a blistering pace and the “smart money” has run to buy SNOW stock. Still, the shares’ valuation is stratospheric at this point, making it very likely that investors will be able to buy the stock at a much cheaper price in the not-too-distant future.

A Hot Sector and Great Technology

Snowflake’s products essentially enable companies to more easily and effectively manage and analyze cloud-0based data. It provides a centralized data-storage solution that can easily grow as companies and/or their data expand. Snowflake’s solution reportedly enables companies to access in minutes data that used to take hours to obtain.

Of course, businesses are rapidly moving data to the cloud, and today’s amazing artificial-intelligence-based data-analysis tools have become very valuable because they save firms a great deal of money.

Snowflake reportedly has 3,000-plus customers, including the huge credit-card issuer Capital One (NYSE:COF) and insurance behemoth Geico. More than 40 of Snowflake’s customers pay it over $1 million per year.

As of the first quarter, research firm Forrester identified Snowflake’s data management products as being roughly as strong or stronger than Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL). Snowflake did, however, trail IBM (NYSE:IBM), Teradata (NYSE:TDC), Oracle (NYSE:ORCL) and SAP (NYSE:SAP) by significant amounts in the metric.

However, Snowflake’s pricing model, which enables its customers “to only pay for what they use in terms of computational processing and data storage,” differentiates it, according to a Seeking Alpha columnist. Further, Snowflake’s customer-satisfaction ratings, as measured by third-party websites, is the highest.

Snowflake’s top-line growth has been accelerating, as its product-revenue growth reached 117% year-over-year and 23% quarter-over-quarter last quarter. Finally, its gross profit was positive in the first half of the year, indicating that its bottom line will easily become positive overall soon as it continues to grow.

Snowflake Is Attracting the ‘Smart Money’

Snowflake’s CEO, Frank Slootman, was the CEO of ServiceNow (NYSE:NOW) from 2011 to 2017 and grew that company’s top line to $1.4 billion of annual revenue from $100 million.

Slootman was also CEO of Data Domain, which was bought by EMC for $2.4 billion. He clearly knows what he’s doing when it comes to managing tech firms, and the fact that a CEO with such a great track record chose to lead Snowflake is a wonderful validation of the company’s technology and employees.

Also validating the company and SNOW stock are the big-name investors who have plowed money into the shares, including Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B), which bought $735 million of SNOW stock.

Berkshire acquired $250 million of the shares before the IPO and $485 million of shares at the company’s IPO price of $120. Salesforce also bought $250 million of the shares at the IPO price, while two of Snowflake’s early venture-capital backers also acquired more shares at the IPO.

A Lockup Expiration Is Coming

SNOW stock trades at a huge trailing price-sales ratio of 120 times and its price-book ratio at the end of Q2 was a gigantic 82. It’s important to remember that the “smart money” appears to have largely bought the stock at the IPO price of $120, about 50% below where the shares are trading now.

Meanwhile, on Dec. 16, most of the company’s employees will be able to sell up to 25% of their shares for the first time. That’s what’s known as a lockup expiration. Starting on that day or shortly before it, SNOW stock will probably come under a great deal of pressure and drop meaningfully.

The Bottom Line on SNOW Stock

With the shares’ market capitalization standing at $68 billion, I believe that the stock can rise meaningfully above its current levels within two or three years, in light of the company’s strengths. But, given the shares’ huge valuation and the looming lockup expiration, investors should wait until at least the end of December before pulling the trigger on the name.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.


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