Is Snowflake Stock Overvalued?

Is Snowflake Stock Overvalued? Collecting and analyzing data has always been critical to business.

At the turn of the century, data storage was quite a bit more involved. Companies had massive on-site facilities dedicated to this purpose, and they had to build and maintain data centers capable of managing the volume of information coming through.

There were limits to how much could be collected and effectively analyzed, but all that has changed thanks to the cloud. 

With the help of technology, companies of all sizes have spent recent decades increasing the types of details they track and how they utilize that information to differentiate marketing, sales, and service.

The introduction of cloud computing was a game-changer for data collection and storage. Providers like Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) offered simple, secure cloud-based data services using an SaaS (Software as a Service) model.

There was just one problem.

Cloud computing services and data management software were inseparable. Businesses could not mix and match between products, and tools from one provider couldn’t be used with data stored elsewhere.

Enter Snowflake: the first standalone cloud-based database software. For the moment, Snowflake is the only solution that can be used in conjunction with any cloud service.

Snowflake was founded in 2012, though it operated in “stealth mode” for its first two years. It started making headlines when the period of quiet ended in 2014, and it held its IPO in September 2020. 

This IPO impressed with a number of notable achievements. One of the biggest was persuading Warren Buffett to buy in through his holding company Berkshire Hathaway (BRK.B).

Buffett is known for staying away from IPOs in general, and he has demonstrated a particular lack of interest in gambling on new technology companies. Nonetheless, Berkshire Hathaway put more than $500 million into Snowflake, and the IPO was wildly successful. 

On its first day of trading, share prices doubled, and they have since tripled in value. That could be a sign of extraordinary growth and potential for above-average returns. However, some investors aren’t convinced. Is Snowflake stock overvalued, or is this the best time to buy? 

What Makes Snowflake Different?

The secret to Snowflake’s success is that it has a unique approach to data, and it offers features that simply aren’t available anywhere else.

Aside from being first to develop data warehousing for the cloud, Snowflake does something clients love: it sets pricing based on utilization rather than a flat subscription fee. 

Snowflake stock went up dramatically on its first day of trading and through the weeks that followed. Investors were anxious to get on board with the company for a variety of reasons, but one of the biggest was the obvious faith market experts and industry leaders had in Snowflake’s prospects. 

In addition to Berkshire Hathaway, Salesforce (CRM) invested hundreds of millions, and Snowflake had already raised massive amounts from venture capitalist (VC) firms.

VCs involved in Snowflake prior to the IPO include Altimeter Partners, Iconiq Strategic Partners, Redpoint Ventures, Sutter Hill Ventures, and Sequoia Capital. With backers like these, new investors were confident that Snowflake is going to deliver impressive returns. 

Snowflake Financials Reveal Massive YoY Growth

Snowflake announced results for the quarter ending October 31, 2020, during the first week of December. This marks the first quarterly financial report since the company went public. Product revenues came in at $148.5 million, which is an increase of 115 percent year-over-year.

Total revenue was at $159.6 million – an increase of 119 percent year-over-year. There are 3,554 total customers, and the net revenue retention rate is 162 percent.

Snowflake noted that 65 customers have trailing 12-month product revenue of more than $1 million. 

It is worth pointing out that Snowflake has $927.9 million in remaining performance obligations on the books. This amount, which has grown 240 percent year-over-year, represents contracted future revenue that has not been recognized in current figures but will be included in future results. 

Is Snowflake Valuation Too High?

No one wants to miss out on the next millionaire-maker stock, which is a big part of the reason investors drove Snowflake’s share prices up. However, market analysts are starting to pull back on their enthusiasm.

Snowflake is likely to see strong profits and deliver shareholder value, perhaps sooner than the average tech startup, but at its current valuation, those projections are already baked in – and then some. 

A variety of other tech stocks are in better territory from a valuation perspective, which makes them more likely to reward shareholders in the near-term. Examples include cloud-based MongoDB (MDB), which makes it possible to manage all sorts of data – not just spreadsheets.

Okta (OKTA), a leader in identity management, ensures that data is kept secure, and Square (SQ) is taking advantage of the transition to digital payment technology.

These three are growing at a rapid rate, and they are available to investors at more reasonable prices.

Will Snowflake Stock Drop?

Snowflake’s valuation is starting to concern some of the most influential market analysts.

Within a week of the company’s quarterly earnings report, Deutsche Bank changed its rating from buy to hold. That in itself was enough to cause a drop in share prices.

If other analysts follow, Snowflake shares could drop even more. However, it is unlikely that any decline will be precipitous, and most agree such a trend would be temporary.

Is Snowflake Stock Overvalued? The Bottom Line

The bottom line is that Snowflake stock is overvalued – though if you have already bought shares, don’t be alarmed.

The company is likely to catch up with its valuation in coming months, so there is no need to sell those shares.

However, this isn’t the right time for new investors to buy in, especially those with short-term financial goals. It’s not yet clear when the numbers will even out, so this stock is best for investors who can wait. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.