Snowflake Stock Slumps 10% After IPO. Should Investors Worry?

Author: Tim Phillips

September 18, 2020

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Snowflake Inc (NYSE: SNOW) saw shares crater 10.4% as the year’s hottest IPO couldn’t notch up another day of positive gains after popping 112% from its listing price on Wednesday.

Tim’s Take:

There’s no doubt that Snowflake has a huge runway ahead of it for growth. The cloud-based data warehousing platform also has sizzling revenue rates to match.

Revenue was up 133% year-on-year for the six months to 31 July 2020. Its unique product offering focuses on being a cloud-based data warehouse that functions across the three major clouds; AWS, Azure and Google Cloud.

This is in stark contrast to the bulky legacy data warehouses that a lot of enterprises now use, with on-premises data centres.

The move to the cloud is, as numerous commentators like to say, “unstoppable”. That’s true. But the second-day performance of Snowflake has also highlighted the risks as a slew of tech firms come to market.

The fact that a 50% gain for software firm Jfrog Ltd (NASDAQ: FROG) on its debut disappointed some investors, shows you the mania that’s currently gripping newly-public firms.

And Jfrog has a market cap of around US$2 billion. After Snowflake’s first day pop, it was worth somewhere in the region of US$70 billion.

Wait for cooling-off period

I suggest long-term investors sit on the sidelines and buy in when it inevitably cools off. Admittedly, I was previously bullish on the IPO after it initially priced shares at US$75-85. 

Snowflake soon took the range up to US$100-110 before it upped it to US$120 a day before it traded.

All this came after news that Warren Buffett’s Berkshire Hathaway Inc (NYSE: BRK.B) and salesforce.com Inc (NYSE: CRM) were taking sizeable pre-IPO stakes. 

However, even after the 10% drop, Snowflake shares are trading at US$227 apiece – giving shares an eye-watering price-to-sales (PS) ratio of 135x.

Compare this the already-pricey Zoom Video Communications Inc (NASDAQ: ZM) at 85x and Shopify Inc (NYSE: SHOP) at 48x – two investor favourites in the tech space – and you can start to see how Snowflake has got way ahead of itself. 

The company has an amazing long-term growth story but at these prices, it’s too hard to stomach.

Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Zoom Video Communications Inc and Shopify Inc.

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About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.