Snowflake: Will the Stock Surge or Slump by End of 2020?

Shares of Snowflake (NYSE: SNOW) have already generated massive returns for IPO investors. The stock had an initial IPO price of $120 and the first trade opened at $245 per share, effectively doubling shareholder value. SNOW stock is currently trading at $264 indicating a market cap of $73 billion.

So will Snowflake stock end 2020 at a record high or will it decline significantly?

 

Snowflake provides a cloud-based platform

Snowflake provides an enterprise-facing cloud-based data platform that enables users to consolidate data to drive business insights.  Basically, Snowflake collects data from various enterprise computing platforms and stores it on an integrated platform. This helps it break down silos making it easier to analyze and accelerate decision-making processes.

The company will continue to tap into the rapidly expanding cloud-based data solutions market. According to Snowflake’s management, it has a total addressable market of $81 billion. Comparatively, the company is forecast to post revenue of $565.77 million in fiscal 2021 and we can see it has enough room to grow top-line at a fast clip in the upcoming decade.

In the fiscal year ended in January 2020, its sales were up 147% year-over-year and soared by a massive 133% in the first two quarters of fiscal 2021 as well. Sales in the July quarter were up 121% at $133.1 million.

Further, the number of customers with an average contract value of $1 million rose from 14% to 41%. Its net retention rate stands at an enviable 158% which shows that existing customers are spending a lot more to use Snowflake’s integrated cloud platform.

Snowflake ended the fiscal second quarter of 2021 with a customer base of 3,117, up from 1,547 in the prior-year period. It currently has around 30% of Fortune 500 clients as its customers and has also attracted large investors such as Berkshire Hathaway (NYSE: BRK.A) and Salesforce.com (NYSE: CRM).

 

Snowflake is trading at a massive premium

In the last 12-months Snowflake’s sales is around $405 million while its losses were $343 million. This means Snowflake stock valued at 182 times its trailing 12-month sales, making it one of the most expensive stocks right now.

However, it might take a few years for Snowflake to report positive net margins on a consistent basis as it continues to focus on reinvesting in growth and expanding its customer base. It ended Q2 with a net loss of $77.6 million which was primarily driven due to high sales and marketing expenses of $92.7 million. The high-growth company is yet to post a profitable quarter but increased its gross margin to 56% in fiscal 2020, up from 46% in 2019.

There is little doubt about Snowflake’s stellar growth prospects as it continues to establish itself in the cloud-data vertical. However, its sky-high valuation and massive losses suggest it is very vulnerable in a broader market sell-off.

In case the market crashes again or even undergo a significant correction, Snowflake might easily lose 50% in market cap given its lofty valuation.

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.