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Thinking About Buying Snowflake Stock? Here’s Why You Shouldn’t

Last Updated September 23, 2020 2:31 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 2:31 PM
  • Shares of Snowflake more than doubled in their first day of trading.
  • Snowflake stock is the most expensive among all tech companies.
  • An analyst gave the stock a “sell” rating.

If you’re thinking about buying Snowflake stock, it might not be a good idea. The stock just received a sell rating.

Snowflake Stock Could Fall to $175

Snowflake, a cloud-computing company led by veteran CEO Frank Slootman, has prominent supporters and clients. Warren Buffett’s Berkshire Hathaway and Salesforce have both invested in the business.

The company more than doubled its revenue in the first half of 2020, from $104 million to $242 million . It recorded a substantial net loss of $171 million between January and June 2020, barely less than the $177 million in 2019 in the same period. The company had more than 3,100 customers at the end of July, including Adobe, Capital One, and Sony.

Shares of Snowflake more than doubled on their first day of trading in the biggest software IPO ever. It started trading at $245 a share and closed at $253.93 on September 16. A day earlier, Snowflake priced shares at $120. Snowflake stock continued to swing in the following days.

snowflake stock
Snowflake stock fell by 8% on Monday. An analyst sees the stock plunging by about 25% from current levels. | Source: Yahoo Finance 

Shares fell by 8% on Monday after the first Wall Street firm to initiate coverage on Snowflake slapped a sell rating and warned of a “violent selloff.”

Summit Insights Group, a relatively small Wall Street shop, said in a note to clients  that Snowflake is not a unique company in the enterprise software arena and expects the stock to fall by about 25% from current levels. The company has set a price target of $175 per share, which is 27% below Friday’s closing price, but still well above Snowflake’s IPO price.

Snowflake Is the Priciest Tech Stock

Summit praised the company itself, calling it “cutting edge,” but said Snowflake would have to perform “flawlessly” in the coming quarters to justify its current price.

Analyst Srini Nandury said: 

For the stock to work from the current levels, Snowflake needs to execute flawlessly quarter after quarter, and have to live up to lofty expectations and grow into its valuation. While Snowflake’s management is stellar and is known for its execution, the odds of Snowflake’s stock faltering are high.

Snowflake stock is the most expensive name of all tech companies.

The analyst commented: 

Our SELL rating is based on the belief that SNOW is the most expensive name in all tech, with limited differentiation with respect to Redshift, Big Query, and Azure SQL Database.

Snowflake valuation is so high that other frothy tech stocks look cheap in comparison.

Investors flocked to Snowflake in a hot period for IPOs, giving the company a rich valuation, even by the standards of high-tech names. Snowflake has generated $403 million in revenue in the past four quarters by offering database software for the cloud, giving it a price to sales ratio of around 128x.

Zoom Video Communications held the crown of the most expensive technology stock by many indicators, but its ratio of price to sales in the last four quarters is only about 90.

Is Snowflake stock SNOW a good investment? Watch the video below:

Summit also identified potential headwinds for Snowflake stock in the coming months, saying insider selling and a potential secondary offering would create selling pressure.

If you’re looking for stocks to buy, you might want to take a look at Goldman’s list of “Rule of 10” growth stocks.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be conidered investment or trading advice from CCN.com.