Snowflake Stock Is Still Overvalued, Even for a Growth Cloud Company

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Cloud data-warehousing company, Snowflake (NYSE:SNOW), founded in 2012, has been one of most-followed IPOs of 2020. On Sept. 16, SNOW stock started trading at an opening price of $245.

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It was hailed as not only the largest public-debut of this year, but also the biggest software IPO ever. The same day, it hit an all-time high of $319. Now the shares are shy of $250.

A data warehouse typically refers to a centralized, secure repository of data.

Researchers from Montclair State University suggest we’re not even close to having enough space to meet our needs.

“We need scalable infrastructure and technologies that can access data from multiple disks simultaneously,” the wrote. “Cloud computing provides paradigms for data analytics over such huge datasets.”

Put another way, we are likely to see the increasing importance of data management within a cloud setting. Therefore, investors wonder whether now would be a good time to buy SNOW stock.

If you are not yet a shareholder, you may want to wait on the sidelines until there is further pull-back in the share price. We believe a fall toward $225 would improve the margin of safety for long-term investors.

A Closer Look at SNOW Stock

According to a recent SEC filing, the company aims to “mobilize the world’s data” and is “reimagining data management for the cloud.”

The company believes its platform “enables customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data,” and “solves the decades-old problem of data silos and data governance.”

Put another way, Snowflake’s platform integrates information from different databases within an organization. As a result, that customer can better analyze and in the end utilize the data.

A recent study led by Helmut Spengler of the Institute of Medical Informatics, Technical University of Munich, Germany highlights the importance of warehousing platforms to support different use cases and different types of data.

Snowflake’s revenue for Q2 FY21 was $133 million. A year ago, the number had been $60 million, and for the six months ended July 31 and 2020, revenue was $104.0 million and $242.0 million, respectively. It meant a YoY growth of 133%.

As of end of July, the group had 3,117 customers, which showing an increase from 1,547 customers as of July 31, 2019.

Of those 3,117 customers, seven were of the Fortune 10 and 146 were of the Fortune 500 lists, which respectively contributed about 4% and 26% of revenue for the six months ended July 31.

The company’s gross profit margins stands well over 50.2%. However, it is still a loss-making entity. Its net loss was $177.2 million and $171.3 million for the six months ended July 31, 2019 and 2020, respectively.

Although it might be an encouraging sign to see the net loss level stayed close to constant, it might have also been due to cost-cutting measures prior to the IPO.

Should You Buy SNOW Now?

Big data is ever-growing, especially with increased digitalization in the days of the pandemic. And investor appetite has fuelled companies serving customers in this space, including young stocks that are not yet profitable.

Snowflake is possibly at the right place at the right time.

However, even for a growth company, the company is richly valued. Its P/S ratio stands at 132.86. Although the company is expected to grow significantly over the long term, this is an expensive metric.

As long as investors are ready to back technology stocks and hot IPO names, SNOW stock could still easily increase in value. However, in the case of a broader market decline, early investors may be ready to hit the sell button, too.

We would ideally wait at least several weeks to see the next earnings report as well as put the on-going volatile earnings season behind us.

Current shareholders may also consider initiating covered call positions. Such a move would decrease portfolio volatility, provide a cushion against a potential decline, but also enable investors to participate in an up move. An at-the-money (ATM) call with Nov. 20 expiry could be a possible choice.

Finally, those investors who are interested in recent IPOs or data and cloud companies may also consider investing in an exchange-traded fund (ETF).

Examples would include the Global X Cloud Computing ETF (NASDAQ:CLOU), the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (NYSEARCA:SRVR), and the Renaissance IPO ETF (NYSEARCA:IPO).

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

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.