Is Snowflake in a Bubble After Missing Earnings?

  • A high-profile IPO in September with high-profile investors
  • Earnings miss on the first try
  • The stock moves into the stratosphere
  • A sweet package for the CEO
  • A dark cloud memory from the dot.com bubble for the cloud companies- Be careful!

Snowflake Inc. (SNOW) provides a cloud-based data platform in the United States and worldwide. The proprietary platform allows customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data. Various organizations use the platform across a vast range of industries.

Snowflake has been around since 2012, but the company went public via an IPO in mid-September 2020. This year has been a mixed blessing for technology and initial public offerings. The global pandemic has weighed on global economic growth. Meanwhile, technology shares soared as the industry provided the tools and services during lockdowns and social distancing.

The technology sector soared as it benefited from COVID-19. The coronavirus increased the demand for online technology, which hastened the growth of businesses. The pandemic changed behaviors as many non-tech savvy people had to educate themselves and change to survive and thrive. The shift will remain a significant historical legacy of 2020 long after the coronavirus fades into memories.

SNOW is a company that has a bright future. Many leading investors saw the potential for the company and made substantial investments during the IPO.

A high-profile IPO in September with high-profile investors

SNOW shares opened for trading the day of its initial public offering on September 16, 2020, at $245 per share. The stock began trading at more than double its IPO prices. The timing of the offering was serendipitous as it coincided with a substantial bullish run in technology stocks.

SNOW came to market with lots of bullish wind in its sails. The company had commitments to buy its shares from Warren Buffett’s Berkshire Hathaway (BRK.B) and Marc Benioff’s Salesforce Ventures (CRM). The company generated lots of excitement because it offers a new twist on technology infrastructure for many businesses.

SNOW produces database software that uses the same standard as Oracle Corporation (ORCL), but can be used in the cloud and scaled up or down as needed. SNOW offers its customers variable pricing depending on usage. SNOW has a franchise as it is the only standalone company offering this type of software that runs on all of their cloud platforms.

The high-profile IPO buyers did well, as the shares continued to climb after September’s IPO.

Source: Barchart

The chart shows, less than three months after the IPO, SNOW reached its latest high at $429 per share, four times the pre-IPO expectations, and over 75% above the opening price on September 16.

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Earnings miss on the first try

Consensus estimates were for a loss when SNOW reported earnings on December 2, but the number came in below as the company reported a loss of $1.01 per share. There was a silver lining in the report. SNOW’s revenue grew by 119% on a year-on-year basis in its fiscal third quarter, which ended on October 31, according to the company.  During the previous quarter, SNOW’s growth was 121%. Losses fell from $1.92 per share during the same quarter in 2019, but gross margin fell from 59.6% to 58.2%.

The chart shows that the stock dropped to a low of $288 on December 2 but came roaring back and hit a new high of $429 on December 8. SNOW shares were sitting at over the $350 level at the end of last week as the appetite for technology stocks continue to push prices higher.

The stock moves into the stratosphere

At the $353.96 level, SNOW has a market cap of just over $100 billion. Over an average of four million shares of the stock change hands each day. An average of twenty-two analysts on Yahoo Finance has an average price target of $297 for the shares, significantly below the current price. However, the projections range from $175 to $515.

The stock’s technical trend suggests the high end of the range is a logical target, given the never-ending demand for technology stocks. Most Wall Street companies are maintaining hold, equal-weight, over-weight, or outperform ratings on SNOW. None of the analysts are brave enough to cite concern over the massive price appreciation three months after the initial public offering.

A sweet package for the CEO

Shareholders who bought SNOW at the IPO price or on the first day of trading have done well. Meanwhile, the CEO, Frank Slootman, has done even better. Mr. Slootman has become one of the highest-paid technology executives. The compensation package he negotiated when he joined the company in April 2019 awards a batch of options each month for four years. According to an article on Bloomberg, those options are now worth more than $108 million each, or $1.3 billion each year.

The pay packing includes over 13.7 million options with an $8.88 strike price. Many of the shares already awarded to the CEO have already vested, as they become exercisable monthly over four years, starting with the month he came on board, in April 2019.

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The full options package, when paid out in early 2023, would be worth $5.2 billion if the stock remains at the $387.70 level, according to Bloomberg. The stock’s trajectory could mean that the CEO could eventually cash in with an eleven rather than a ten-figure payday. Other executives at the company are also cashing in on the ascent of the stock price. CFO Michael Scarpelli has a similar compensation package, and his options are worth around $29 million per month.

The company’s co-founder, Benoit Dageville, is also Snowflake’s CTO. His stake in the company is worth a cool $3.1 billion. The executives at Snowflake’s business is in the clouds, and so is their wealth.

A dark cloud memory from the dot.com bubble for the cloud companies- Be careful!

A billion here, a billion there, is the new wealth wave in the tech sector. Jeff Bezos, the world’s richest person and the founder of Amazon (AMZN), was worth $181.5 billion at the end of last week. Elon Musk, the king of EV’s and Tesla’s (TSLA) chief, had a bankroll of almost $136 billion. Musk just moved from California to Texas, a move driven by state tax rates.

The numbers are staggering, but they are also reaching dangerous levels. The division of wealth in the US and the world is widening. While many unemployed people suffer during the current wave of the pandemic, the technology leaders watch their net worth expand by hundreds of millions, if not billions, with each new high in their stocks.

The wealth bubble is growing. In markets, it is virtually impossible to pick tops or bottoms. Markets tend to go a lot higher than logic dictates during bull markets and lower when the bear roars. It is not the first time that the technology sector experienced, as Alan Greenspan said, “irrational exuberance.” Excessive speculation in internet-related companies from 1995-2004 ended in tears.

In 2000, the crash in technology stocks erased almost $8 trillion of wealth. The tech-heavy NASDAQ fell from a high of 5,132.52 in March 2000 to a low of 1,108.49 in October 2002, as the sector lost 78.4%. It took over a decade and a half for the NASDAQ to recover to the March 2000 high.

At the beginning of December, SNOW missed consensus earnings estimates, but the stock shrugged off the report and moved to a new high. I believe two dynamics are pushing technology shares to the moon at the end of 2020, the most challenging year in our lives. First, lots of capital on the sidelines is searching for value or looking to hop on a bullish trend. Technology is the express elevator of the stock market, with many participants crowding in and looking for the next irrational level. Second, and far more importantly, the price of assets reflects the decline in fiat currencies’ purchasing power. The bottom line is that central bank liquidity and government stimulus are eating away at the value of money. As the money supply expands, more cash chases a limited supply of assets.

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Technology has shined through the pandemic as it allowed people to work from home, communicate with friends, family, and business associates. It also softened the blow of social distancing as ordering essential products online and enjoying entertainment, and other events from the safety of homes have increased the profile of technology companies and their earnings.

Gravity is a powerful force. The price tag for the widening division of wealth created by the ascent of the technology sector could come due over the coming months and years. I never try to pick a top in markets as it is a fool’s game. Just ask any professional trader that attempted to short TSLA when the company looked like it could not service its rising debt level.

However, the shift will come one day. Irrational, illogical, and unreasonable exuberance has not yet peaked as the central banks and governments continue to fuel the fire with never-ending amounts of cash that is worth less every day.

SNOW’s CEO may have options worth eleven-figures by 2023, but that money could be worth a lot less, and the potential for a sudden correction that makes those calls worth a lot less rises with each new high.

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SNOW shares fell $19.65 (-5.97%) in premarket trading Tuesday. Year-to-date, SNOW has gained 22.99%, versus a 15.72% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…

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