Cloud-data management company Snowflake (NYSE:SNOW) issued its IPO in on Sept. 16. Seeing SNOW stock as a hot new opportunity in tech, investors did not flake out on its debut. The company’s share price skyrocketed on the first day of trading, making it the biggest tech IPO this year. It hit a market capitalization of $70.4 billion and a share price of $253.93.
Clearly, the stock was off to a good start. But things haven’t been so simple a few weeks after its IPO.
With the exception of a recent selloff, tech stocks have been on a winning streak since the onset of the novel coronavirus pandemic. So it comes as no surprise that Snowflake’s IPO was impressive. However, the company has also attracted its fair share of haters, with many claiming that the stock is overvalued.
Regardless of these bearish attitudes, I believe SNOW stock is worth the hype. Here’s why.
What Makes SNOW Stock So Special?
Cloud management systems have been dominating this year since remote work became the norm. However, it’s also worth noting that the space is crowded with some legacy players like Oracle (NYSE:ORCL) and Amazon’s (NASDAQ:AMZN) Amazon Web Services (AWS). Given that these tech-giants control the cloud market, how does a newbie like Snowflake even stand a chance?
Snowflake, a minnow in the Cloud pond, is not your average tech-startup. The company took innovation to the next level by reinventing the database for the cloud. This system helps other tech companies expand the reach and capability of their existing products. Snowflake’s notable partnerships include deals with Microsoft (NASDAQ:MSFT), Salesforce (NYSE:CRM) and Amazon. As of July 31, the company has over 3,100 clients.
In addition to a savvy product, you can also attribute Snowflake’s to its CEO, Frank Slootman. The tech veteran managed a slew of high-growth tech companies before Snowflake. His goal was to create a product that would help companies store and manage their digital data. A function that became increasingly important during the pandemic. Slootman also adopted a subscription-based model that helped Snowflake stand out from a sea of competitors.
Thanks to an innovative product and strong leadership, Snowflake was able to rake in the dough in fiscal year 2019. The company achieved an annual growth rate of 174%, bringing its total value to $265 million.
When It Snows, It Blizzards
As alluded to earlier, Snowflake is one among many successful IPOs this year, but its lofty valuation has left some investors on the fence. It’s worth considering some underlying issues with Snowflake’s IPO despite its encouraging numbers.
Although the company made its IPO debut at $120 per share, only institutional investors could buy the stock at this price. This meant that when the increased demand resulted in a price spike to $245, retail investors (aka the rest of us) could not benefit from this. Ultimately, the main winners of the IPO were institutional investors who watched their money double in just a few hours. This is a major reason why many companies are now considering special-purpose acquisition companies (SPACs) as an alternative to traditional IPOs.
Experts also believe that Snowflake’s stock price rose too fast, too soon. As reported by The Motley Fool, Srini Nandury, an analyst at Summit Insights believes that the company’s share price could drop to $175. This could result in a 25% loss for investors who bought the stock during the IPO. Companies like Shopify (NYSE:SHOP) and Zoom (NASDAQ:ZOOM) only trade 30 to 40 times the sales estimate, while Snowflake is currently trading at 70x. Companies that are valued this high could come crashing down to a moment’s notice.
Snowflake did have some underlying issues with its IPO and may be overvalued at its current price. So it comes as no surprise why some investors are not all in with SNOW stock. But it’s worth noting that the company is also backed by Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which owns more than 4 million shares of SNOW stock. Moreover, the tech unicorn experienced massive growth in 2020 and its winning streak could very well continue into 2021.
The Bottom Line On Snowflake
The verdict on Snowflake stock is truly a mixed bag right now. While some investors are all-in on this company, others have cast their doubts about its inflated valuation. I would say the stock is a strong buy given the environment we live in.
The pandemic has created many changes in the corporate tech ecosystem — many of which could be permanent. Snowflake is capitalizing on this trend by placing emphasis and on how companies use and store data. This data will only continue to grow at an exponential rate and Snowflake’s technology is well-poised to cater to this need.
If you are looking to invest in the cloud space, SNOW stock will be a valuable addition to your portfolio.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.