Snowflake Inc. (SNOW) is a cloud technology business that IPO’d last week. Their reports are looking really promising, and they’ve caused quite a commotion in the investing community. As a matter of fact, Warren Buffet’s company is backing them up!
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Here are some reasons to consider Snowflake Inc:
- They’re new
- They’re demonstrating great growth
- They’re backed up by big names
- They’re looking very promising right now
- They’re in a very good field
All of these factors make them seem like a great (and relatively safe) long-term investment choice, right?
And, if we think short-term, all of these things sound great. Since there is a lot of interest and people are talking about them so much, there’s a good chance that their stock prices will keep going up.
But I’m not a short-term investor, am I? You’re here because you are interested in long-term investment strategies, and that’s precisely what I am going to give you today. I’ll look at SNOW from a long-term investor’s perspective and give you my honest opinion.
We are going to apply the long-term investing mindset to Snowflake Inc.’s stock prices and evaluation and see if they make a good investment target. We’ll look at their:
- Business model
- Financial situation
- Future potential
Of course, at the end of this post, I’ll also tell you if I am going to be buying Snowflake Inc. shares myself.
Currently, Snowflake Inc. is ranked as the largest software IPO of all time. And while that is largely thanks to Mr. Buffett’s involvement, it’s still a major factor to consider moving forward. They managed to surpass the previous leader in the category by more than three times.
Originally the estimate for SNOW’s price per share was sitting at $75-$85, but given all the hype the Initial Price Offering was placed at $120, surpassing even the expected range of $100-$110.
Early Wednesday afternoon, the demand was so high, that the shares went up to $245 and climbed to over $300, for a whopping 150% increase.
And, I don’t know about you guys, but that isn’t something that I expect to see from a brand-new company hasn’t even started to turn a profit yet. Of course, by the end of the day, the market calmed down a bit, and SNOW was sitting at 112% of where they started.
At the time of this recording, Snowflake Inc. is trading at $226 per share, which is still well above the initial estimates. The stock is expected to remain highly volatile, and, naturally, this draws in a lot of short-term investors.
But remember – we’re here for the long term!
Why is this stock so attractive?
Snowflake is a fast-growing cloud company. They are a Software-as-a-Service (SaaS) company, and we all know how amazing the margin possibilities in this field are.
So what do they do?
They manage and analyze data. A service that is in huge demand in today’s highly digitalized world. They build cloud-based applications and offer data science-related services B2B. And, to top it all off, their apps are compatible with the big-time cloud service providers, like Google Cloud, Amazon, and Azure.
“The more customers adopt our platform, the more data can be exchanged with other Snowflake customers, partners, and data providers, enhancing the value of our platform for all users.”
Snowflake Inc. managed to attract not just Mr. Buffet’s Berkshire Hathaway, but also Salesforce (the most prominent players in the cloud software field, specializing in Customer Service Relationship providers, currently holding over 18% of the CRM market share).
And, if the cloud market remains healthy and Snowflake is likely in for a bright future.
The market seems healthy, and analysts point that it is likely not just to remain healthy, but also continue to grow and expand. The SaaS market is expected to surpass over $150 billion by the end of 2020.
According to bmc, the SaaS market is expected to be in the double-digit territory as far as 5-year annual growth rates are concerned.
Okay, now let’s talk about valuation. Again, please keep in mind that the data shown on screen is going to match the market at the time of this recording. For more up-to-date information, please head on over to Yahoo Finance and follow along with me. Also, please remember that Snowflake Inc. is not profitable yet, so we can’t really look at profits. Instead, we’re going to use sales.
Yahoo Finance currently lists the following statistics:
Market Cap – $62.9 billion
Total Revenue – $402.6 million
So, considering their current share price, they’re sitting at around 150 PS (price-to-sales ratio). For comparison, the prominent tech giants (Microsoft, Google and Amazon) trade for many times less:
- Microsoft – 11 PS ratio
- Google – 6 PS ratio
- Amazon – 5 PS ratio
And, of course, there is a good reason for this difference. Because Snowflake has immense growth potential, even if it is still yet to “prove” it in practice. Speaking of proving it in practice, during the last fiscal year, Snowflake enjoyed revenue growth of over 170% (174 to be exact) In comparison, and the tech giants were all in the lower double digits:
- Microsoft saw revenue growth of 14%
- Google saw revenue growth of 18%
- Amazon saw revenue growth of 20%
Then again, these companies are already so huge that even a “mere” 10% growth is something amazing.
Investors feel that the valuation of Snowflake can drop really quickly if they stop snowballing.
Okay, but what if they don’t stop growing? What if they retain this incredible growth rate of 175%? What happens to their PS ratio? Well, I did some math, and it turns out that it will take until 2025 for their PS to go down into the single digits (assuming their share prices remain the same, which is highly doubtful). Because, if they continue growing at this rate, the share price is likely to go up.
Then, there’s also the actual profitability.
As it stands right now, Snowflake Inc. is not turning any profit whatsoever. As a matter of fact, they’re losing hundreds of millions of dollars every year. For 2018, they had registered a loss of $178 million followed by $348million for 2019 (a 96% increase).
They’ve got all the ingredients for success in the future:
- The tech field is growing and will continue to do so.
- More and more companies will turn to cloud computing and cloud-related services
- Snowflake has shown incredible growth
- Snowflake has great backing
- Funding is not going to be a problem
But this has a significant impact on the stock itself. It is precise because of all these factors, SNOW is valued highly.
Am I investing in Snowflake? Should you?
Personally, I like to keep things simple, and here, there’s no simplicity. Instead, there is a lot of volatility and minimal certainty. I am almost sure that, if I invest in this stock, I will have to deal with doubts and worries in the future.
Besides, I would be betraying one of the most important rules of investing – don’t get into uncertain positions in markets that you don’t understand. And while I do understand investing really well, I’m no cloud expert.
You can pay a lot less money for much more stable and well-diversified and well-established companies that SNOW.
Companies that don’t come with all the negative and worrisome factors. If you are a beginner, looking to buy into the cloud market, I’d suggest something like Google, Amazon, or Microsoft. They’ve been around for ages, and they actually turn a profit already. They also grow pretty well, especially considering their current size and profit. They are the leaders for a reason.
And so, this is my conclusion – SNOW is not a stock for me. Maybe if it dropped by like, I don’t know, 50%? Perhaps then I’d consider buying. But, as it stands right now, I am going to stay away from it.
And this concludes my post on Snowflake Inc. It is a pretty interesting stock and I would definitely consider buying it if the price goes down, but it’s definitely not something for me right now.
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Thank you all for reading, and until next time:
Stay green and motivated!
Suggested Further Reading:
- 7 Great Ideas How to be Better with Your Money – More about budgeting
- Personal Financial Rules – Why financial independence is so important.
- Learning How To Make Wise Investments 7 Ways To Go – And here’s what you can do with all the money you save.
Minimalism and Healthy Living:
- A Healthy Life Is Your Most Vital Asset and Here’s Why – My Kangen Water journey
- My approach to minimalism in 15 steps – Why I chose minimalism
- How to live a minimalist life – My very own minimalism Ebook
- How to use ionised water – How I use Kangen Water for my home and office
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Recommended books for further reading:
- The Business Book: Big Ideas Simply Explained
- The Lean Startup: How Constant Innovation Creates Radically Successful Businesses
- Business Adventures: Twelve Classic Tales from the World of Wall Street
- The Snowball: Warren Buffett and the Business of Life
- The Simple Path to Wealth: Your road map to financial independence and a rich