In a healthy market environment and one where the price for growth doesn’t always come cheap, Snowflake (NYSE:SNOW) stands out. But are shares still worth the risk to buy today, or best put on the wish list for a later purchase? Let’s see what’s happening off and on the price chart of SNOW stock, then offer a risk-adjusted determination to avoid a potential ‘I told you so’ and capture greedy trends with less to fear.
Cloud-play SNOW is expensive. And most investors agree. From CNBC’s James Cramer to Wall Street’s cautious analyst community, or as CFA Thomas Yeung recently laid out for InvestorPlace, the recent IPO’s hefty price tag isn’t a secret.
But it’s also true many of the market’s most lauded investments defied skeptical cries of pending doom while growing over time into their seemingly implausible valuations. Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) are both legendary examples.
Today, there’s Zoom Video (NASDAQ:ZM). The company’s rise to prominence during Covid-19 has ballooned its valuation to more than 107x sales and capitalization of $140 billion. The stock has also been panned throughout its meteoric rise of more than 644% in 2020. Now SNOW is trying to follow this expensive playbook.
Snowflake Valuation and Support
Snowflake currently fetches a hefty valuation of $67 billion. To be fair, that’s less than half of Zoom. Still, it would be silly to not recognize the stakes are extraordinarily high compared to the vast majority of publicly-traded companies. The conviction is even more apparent given SNOW’s steeper price-to-sales ratio of nearly 127x. Yikes! Maybe not.
Supporting SNOW as one of those few investments capable of growing into an otherwise insane-looking valuation, one might only need to appreciate backers like Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) and newly-appointed Dow Jones constituent Salesforce (NYSE:CRM).
While different, both company’s management definitely know a thing or two about what it takes for an investment to be a wild success. Sure, those investors also got in SNOW at insider prices. Still, with Berkshire holding 15% of Snowflake’s outstanding shares and Salesforce just under 10%, it speaks volumes about longer-term confidence in the outfit. There’s more.
Snowflake’s cloud platform offers data warehousing and on-demand computing power. That’s not unique. Microsoft (NASDAQ:MSFT) and Amazon offer similar services. But as Thomas Yeung notes, the company’s pure-play angle and focus on business intelligence may make SNOW an attractive takeover candidate. Reasonably, always tricky 10-year forecasts could go out the window and a much quicker windfall might be on the horizon. That’s not all, either.
As James Cramer also points out, given management’s pedigree, SNOW’s ‘mouth-watering numbers’ and impressive customers like Adobe (NASDAQ:ADBE) to DocuSign (NASDAQ:DOCU) and Square (NYSE:SQ), there are reasons to believe Snowflake will be a ‘great long-term performer’ despite today’s steep price of admission.
SNOW Stock Weekly Price Chart
Source: Charts by TradingView
After a head spinning first day of trading, shares of Snowflake have been volatile, but consolidating within what looks like an ascending triangle. It’s far from perfect, but life rarely is. Moreover, with the typically bullish pattern finding initial opposition between SNOW’s 50% and 62% Fibonacci levels, it’s a name to watch as shares attempt to break through key resistance.
For now the view is a move above $265, give or take a point or two, should set the stage for a strong rally which ignores today’s more rational-minded investors. In fact, I wouldn’t be surprised to see Snowflake hit fresh all-time highs given today’s market climate.
I will stress SNOW stock isn’t for the faint of heart, given fundamentals that on paper don’t add up and an illiquid options market which also fails to compute for hedged exposure. Lastly, given what’s been said, for those investors looking to own shares with an eye on the long-term, crossing one’s fingers and waiting for new lows that might make even Warren Buffett sweat, would be a welcome sight before buying Snowflake.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.