Snowflake Stock Slumps 10% After IPO. Should Investors Worry?
Author: Tim Phillips
Date: September 22, 2023
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.
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 ofZoom Video Communications Inc and Shopify Inc.
This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.
This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.