Overvalued Snowflake Tempts Investors From the Edge

Technology stock Snowflake (NYSE:SNOW) is on many investment shopping lists this season after the data-storage company took the market by storm. Snowflake stock, meanwhile, has drawn praise from several analysts even after a mixed earnings report.

The Snowflake logo on a company office in Silicon Valley, California. (SNOW IPO)
Source: Sundry Photography / Shutterstock.com

Shares of Snowflake stock gained altitude after the cloud company’s IPO, which surely brought holiday cheer to those who bought on opening day.

But the stock has its critics, who warn the company is valued too high. And they have a point.

Snowflake Stock at a Glance

Snowflake began in 2012 as a private firm. Its founders were veterans of the tech world whose enjoyment of winter sports prompted the name. They describe Snowflake as a cloud-based data warehouse. Last February, the company said it had about 3,400 customers.

The company held an initial public offering on Sept. 16, 2020, with a target of $120 per share. Snowflake stock opened about double the target and closed that day at $253.93 per share. Talk about enthusiasm.

Since the IPO, the price of Snowflake stock has ranged from $208.55 to a high of $429, which occurred in early December. Shares are currently trading around $320.

The company has a market cap of about $92 billion.

The Valuation Issue

Snowflake’s valuation got attention from the start. Writing in InvestorPlace on Oct. 2 shortly after the soaring IPO, Matt McCall described the value as “stretched” and proposed investors see if Snowflake stock settled.

“Eventually, we should get a decent pullback in this name and that may be the best opportunity to swoop in on shares,” he writes.

More recently, the Motley Fool named Snowflake as one of three stocks that are absurdly overvalued. Citing that SNOW trades for more than 200 times its revenue, it said, “Snowflake’s investors are getting a bit too excited right now.”

The exuberance surrounding Snowflake stock was fueled, at least in part, by the investing community’s reverence for the Oracle of Omaha, Warren Buffett. His holding company, Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) bought a large position – 6.1 million shares – in Snowflake prior to the September IPO.

Berkshire bought its first 2 million shares at the comparative bargain price of $120 per share in a private purchase, then acquired the remaining 4 million shares at SNOW’s debut price of about $253. That puts Berkshire’s investment at about $1.27 billion.

By getting in so early, Buffett’s company was able to immediately notch a handsome gain.

There is no doubt the purchase of the stock was based on Berkshire’s interests. And, it came when the stock was priced lower. But, it’s also true that the participation of Buffett’s holding company adds to the forward momentum of Snowflake stock in the minds of retail investors. These investors could then feel pain when lock-up periods expire and insiders sell shares.

The Bottom Line

To say that exuberance has taken hold of Snowflake stock barely begins to describe it.

The company’s shares doubled on the day of its IPO and since climbed into the 300s. Even after a decline in December, SNOW remains a highly valued equity.

This is a company that is growing but still losing money. For example, during the quarter ending Oct. 31, Snowflake said it posted product revenue of $148.5 million. This marked a year-over-year increase of 115%. The company also lost $169.5 million.

Looking ahead, the company predicted product revenue in the quarter ending in January 2021 to range from $162 million to $167 million. The company also said it was working to reduce losses through growth and by reducing discounts.

At this point, Snowflake stock appears to be precarious. Sure, the market loves growth stocks and has shown it is willing to overlook high valuations in the process. But there are clear warning signs waving here. If this is a stock you want to own, waiting to buy could be to your advantage.

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

Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.

Article printed from InvestorPlace Media, https://investorplace.com/2020/12/overvalued-snowflake-stock-tempts-investors-from-the-edge/.

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