Snowflake: An Excellent Company To Buy, Just Not At This Price (NYSE:SNOW)

There’s an old saying that I often repeat: Be careful what you wish for, it just might come true. Every company wants a headline-making IPO and that is exactly what Snowflake (NYSE:SNOW) got. But, is it necessarily a good thing? There are issues with the recent issuing of stock that Snowflake did over the past week. And, although I think that this company would be an excellent addition to a portfolio, there are high risk factors that make the current valuation impossible to buy into.

Snowflake is a company that is executing brilliantly. However, the IPO price that they achieved in their first few moments of trading have pushed the stock’s price outside of fundamentals that support this valuation. The company initially priced its stock at $120.00. For a nano-second, the stock first traded above $200.00 before breaking above $300.00 and although it has corrected modestly from there, the stock price has largely remained in lofty territory:

(Chart Source: TradingView)

Although I do not want to get into too many of the particulars of what Snowflake does, here is a briefer on what Snowflake is involved in and why their stock shot up as it did. The company does basically two things: They provide cloud storage and data query of data stored. What I found interesting is that the company does not actually store data, they lease the storage from Amazon (NASDAQ: AMZN) Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT) and others. So, really, although the company offers the service of data storage, they have left the tedium of storage to others; it largely seems like a commodity service. In doing this, the company can focus on what it really does: Data queries. The company believes the market to be about $13B currently and rising.

The data queries are where the company’s revenues derive from. The company is growing at leaps and bounds, and that is largely where the hype for getting in to the stock starts. Over the past fiscal year, the company grew revenue by over 173% to $264M. The company has also been printing Annual Run Rates (NYSE:ARR) of between $480M and $500M in the past six months. It is this extraordinary run-rate that has attracted an unusual investor into the segment: Warren Buffett. Largely, the Oracle of Omaha stays clear of tech stocks, but perhaps this growth rate was too rich for him to pass. Getting a proverbial “seal-of-approval” from such an astute investor has brought in additional interest into the company’s IPO and possibly helped to push the valuation to such a lofty level.

It should be noted that in February, the company did a private offering that valued Snowflake at $12 billion. Given the current valuation, the company is now trading at ~$70 billion. While there have been additional increases in revenue, the ARR has largely remained intact. Read: Not much has changed. In February, one of two things occurred: either the offering was significantly underpriced or the current stock price is grossly overpriced. Honestly, I believe both.

The company is growing at leaps and bounds, true. And this makes it difficult to peg exactly where valuation would be. But, as the company continues to grow and ARR growth settles into a more “normal”, if you will, the possibilities of attaining a price discovery are achieved more readily. But, if you are doing a private offering, you are dealing with a private individual instead of Mr. Market and are more likely to lower your price, if but by a small percentage. So, likely the $12 billion offering price in February may have been lower than what the company could have been worth. But, I doubt it was by the amount that the current stock price has valued the company, a gap of $63 billion.

Perhaps one of the culprits is the number of shares issued in the IPO at 28 million shares (With an additional 6 million issued to Mr. Buffett and another private company at the IPO issue price). For a company valued at such a large number, this is not a significant number of shares to be issued. But, that is kind of the rub, if you will. The company has put nothing in its filings with the SEC to say what they are planning on doing with the proceeds of the IPO – roughly $3.3 billion. Snowflake is sitting on cash of about $1 billion. They are not in a position where they are strapped for cash and therefore need to be issuing large amounts of stock. That lack of large issuing of stock may have also contributed to the large increase in the stock’s price.

For these reasons, I believe that the stock price is risky for an investment at this time. And, I also believe that the stock price will come down over time, however, not immediately.

I am reminded of a stock I wrote about frequently, Tilray (NYSE: TLRY) that did the very same thing that Snowflake is doing: remained lofty and untenable for a very, very long time. The reasons were almost identical. There was a lot of hype and the IPO was issued with a small amount of shares. That combination pushed the stock up to about $300.00 quickly as investors pushed into Tilray. Eventually, the hype was taken out of the stock and now the company’s shares are far more in line with its fundamentals and reality. But, that took a couple of years before that occurred.

Snowflake is not much different. There was a small amount of shares offered in the market and there is a great deal of hype along with it. This has pushed the company’s stock up significantly passed its IPO pricing level into fundamentally unattainable levels. Given more shares to trade, I believe price discovery would be at a different level, and more true to fundamentals.

NASDAQ And Pressure On Tech Stocks

I have written and been following developments in the tech stocks as there has been continued pressure on this sector. It was just the 2nd of September where the tech index marked a new, all-time high. Since then, there has been increased selling:

NASDAQ(Chart Source: TradingView)

Anyone using technical analysis as their preferred trading style may be looking at the recent break of support as a key indicator of what potential selling may have in store. I, for one, am not a purely technical trader. But, I pay attention to technical indicators merely because there are a number of individuals that do trade purely on technicals. Given that, these individuals have the potential to drive the market. The key support that was established over the past two weeks, and subsequently broken may play out interestingly in the coming days and it is something that i will be keeping a keen eye on.

For me, however, I am more of a purely fundamental trader. One of the key fundamentals out there right now is uncertainty with the election coming up. Although Biden has a significant lead in the polls, I’m not sure anyone trusts these polls anymore. After all, Hillary had a clear lead going in to the election, and look who won. Maybe history is repeated again.

This uncertainty is one of the variables that I see hanging over the market. But, I also see this as being entirely temporary and once the election is out of the way, then the market can focus on the economy solely.

The other 800-pound gorilla in the room, of course, is the pandemic, which, largely I do not see affecting this company’s future. As a tech company of this type, where they are largely computer based, the company can continue to operate and grow, as it’s shown it has done over the past several months.

With regards to the pandemic, the Federal Reserve has cautioned that more stimulus will be needed to support the economy; the Fed’s actions, albeit substantial, can only go so far. This may be the single biggest factor weighing on sentiment in the market right now. Without Congress putting together an additional stimulus package, the market may be getting more and more nervous about the future prospects of the US economy. Again, however, I point to the election. Neither side wants to capitulate to the other side simply because the game board changes on November. What the pieces on the game board look like no one is certain at this point. And, therefore, there is no reason for anyone to push through these issues.

Conclusion

I like this company a great deal and would buy into it if I had a chance. But, at this valuation, that chance may be long gone for a long time. I believe that the pressure on the overall indexes and markets may help to weigh on the stock. But, if these IPO investors do not sell their shares in large quantities, then the price will simply not move lower (There is usually a lock-in period preventing individuals from selling their shares for a period of time).

However, keep in mind that Snowflake is a company that is growing quite quickly. This will continue to add interest in the stock and perhaps there will be continued buying on the dips. Time will tell. For me, however, I would not necessarily place a short position on this stock; it is an excellent company to own. But, I believe that there will be continued pressure on the coverall market and because of that this stock may move lower over time. Then, I think this would be an interesting addition to a portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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