Request for Saul's view of SNOW

I started “Saul” investing over the past few years and try to occasionally contribute to the board. As others routinely say, I’m very appreciative…the board has been hugely helpful in shaping my mindset and my returns.

One thing that I’ve seen from Saul, over and over, is that valuation doesn’t play in to his methodology. This is different from several other prominent posters on this board where valuation is directly considered. As a reformed value investor, valuation is always present in my mind as I consider Saul stocks.

In one thread, some time back, Bear (I believe it was) and Saul were having a back and forth about valuation, and Bear posed a thought experiment of the form, if Zoom were 5 times as expensive as it is, would Saul still buy it? He was trying to tease out whether Saul was truly FULLY insensitive to valuation. My recollection of Saul’s response was that he would stick to his guns, and he would buy the highest quality companies whether they were overvalued or not.

Well here comes the latest incredible company, SNOW. To my eye it is an incredible business. I tried to get on the IPO shares from my broker, but I received 0 in allocation (all the big guys took it I guess).

So if you agree with me that SNOW is a quite fine company, we now have a direct example of that hypothetical debate before our eyes. SNOW’s valuation exceeds any reasonable mental model I can construct to justify its valuation. In my last post on this board, I spoke to DDOG’s high valuation. Its valuation metrics are sky high, not far from Zoom’s. But while I struggle with DDOG’s, I still own it. SNOW sets a whole different valuation benchmark.

So I am wondering what Saul thinks of SNOW? Would he buy it if the stock settled at around these levels? To me, understanding this would help me understand Saul’s approach more fully, and if valuation just doesn’t play a role.

Thanks,

Rob

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Hi Rob,

I guess I think that there are stocks that have high valuations, and there are other stocks that have “just plain silly” valuations.

Here’s the issue: I don’t have a salary or a pension or new money coming in. I have companies that I’m invested in that I have a lot of confidence in. They are great companies.

In order to buy SNOW at a “just plain silly” valuation I would have had to sell shares in some of my great, high-confidence companies. I probably would have bought a small position in SNOW at $120, but I saw no need to at $250 or $319.

By the way, you mentioned Bear. I think I remember that he thought SNOW was excessively priced at their initial suggested IPO price of $75 to $85. He would have laughed at $319, the high of the day.

You may consider me inconsistent. Well, I never promised you consistency, just that I’d make the best decisions I could.

Best,

Saul

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By the way, you mentioned Bear. I think I remember that he thought SNOW was excessively priced at their initial suggested IPO price of $75 to $85. He would have laughed at $319, the high of the day.

Ha! (Indeed)

At $319, the PS ratio was over 200! That’s dotcom territory!

At $254 (closing price) it’s still 165+.

At “just $80” it would have been 53 or so. I would have done it, but that ain’t cheap!

Bear
(btw, I’m using 265m shares outstanding. That may not be exact. Just FYI.)

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Thank you Saul and thank you Bear!

Saul, I understand your response, and I agree with you fully. But I thought you might have answered differently to Bear’s hypothetical, and it surprised me at the time. So you have cleared it up for me. I found it hard to believe you would truly “buy at any price”, because you are just too smart to do that. I could be mis-remembering what you said as well.

For me, I could certainly wrap my head around SNOW price of $80, and that was the offering price when I requested an allocation. Pricey for sure, but this is a great business. I did believe there would be a big pop…it was just too much that Warren Buffett’s lieutenant took a stake in the company, and so did CRM. Could there ever be a bigger “good housekeeping seal” on that one?

So I would’ve taken my full allocation at $120 as well, even though overvalued, I was pretty sure there would be a “greater fool” out there.

I was absolutely astonished to see it trade around 250, and then even over 300. Not a game I’m going to play…

Rob

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At $254 (closing price) it’s still 165+.

At “just $80” it would have been 53 or so. I would have done it, but that ain’t cheap!

At $80 SNOW has an EV of$22B. Assuming QoQ of 17% the NTM would run in the neighborhood of $1B . So an EV/S would be something north of 22. OK for such a stellar grower.

At $120 theEV/S is 37 or so which is quite high but possibly justifiable. At $250 it would be more than double that. It merits a new category. Call it “silly”

A quick glance at the growth trend for SNOW leads me to conclude that its prospects are strong but perhaps not as great as that for ZOOM, nor for CRWD. These happen to be my biggest holdings and I would not trade them for SNOW.

I would take a 3% position in SNOW if I thought its price were stable.( That might imply a justifiable valuation) But I would employ only new money or the proceeds of something I was planning to sell anyway.

FWIW that is my 2 cents

cheers

arnie

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Hi draj

“I would take a 3% position in SNOW if I thought its price were stable.”

At the risk of sounding ignorant is there a rationale in the ‘3%’ or is it something you routinely use for establishing new positions?

Kindly ignore if OT territory

Thanks,
Pravin

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I tried to buy at IPO through my broker (Fidelity). I’m not a big, important client, or at least not big and important enough to warrant an allocation, so that didn’t work out.

There was no time that I was willing to buy at the market. It just went too crazy too fast. Right now it’s off 9% at $231, that’s not a reasonable price for me. Like Saul, I usually don’t even bother with looking at valuation. I look at the company. But there’s a point where the stock price overshadows everything else. Don’t ask me where that “point” is, I don’t have number or formula in mind. It’s more like I know it when I see it.

I am confident that this stock price level will not be sustained. How far will it have to fall in order to be “reasonable”? Good question. I find myself asking me when will it be reasonable to get in, $120? Maybe $130? I don’t know. So now we start to play the valuation game which I tend to ignore. I don’t have a good answer for the question as it’s something I generally ignore.

But, the way I look at it is that there’s no way to invest in every great opportunity. I only have so much available for investing and then it’s all used up. If I never buy SNOW the worst thing that happens is that I missed an opportunity. But it’s not like my money wasn’t well invested.

Since I’ve been following Saul’s board and benefiting from all the great posts from a lot of investors with more experience and market savvy than I’m likely to ever possess I’ve done remarkably well. Far better than I ever anticipated. I’m OK with missing the boat on some investments. It’s inevitable that I will miss some. The fact that I’m exceeding my own goals on a regular basis is good enough. BTW, my goal, which I thought to be a “stretch” goal was 20% per year.

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I have been paying more attention to whether SNOW and FROG are sucking money away from ZM, DDOG and FSLY, potentially because of this. Once SNOW reports 1 or 2 quarters we will be able to put it in context, but right now it just looks too crazily priced to be a buyer. With ZM, DDOG, CRWD, and FSLY (examples) we already have “public” past performance and our own personal and the group expectations for what future “public” performance will be.

Snowflake looks really interesting, no doubt, as a product. Whether we have enough reliable metrics to place it in any comparison to the stocks & companies we know better is much less clear. AND, we’ve never listened to management speak on a conference call to get a sense of who they are, and how they speak to us, and to WS analysts.

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The price that SNOW is at right now isn’t a true measure of its market valuation. There are far too many factors involved right after an IPO that can falsely elevate or depress a stock price. Give it a few months, and we’ll see where the market really values it. Once the market as a whole has settled on a valuation, I think valuation becomes less important from a growth stock investor’s perspective, and it’s more important to accurately assess whether growth will continue at a relatively steady rate which would allow the stock to maintain that assigned valuation.

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How far will it have to fall in order to be “reasonable”?

One might better ask, how will they perform compared to today’s elevated expectations?

The problem with today’s prices is not so much the price itself, but the lack of track record to make one confident that they will succeed in the long run the way other choices we have available to us are doing. We have other choices. Good choices. SNOW has to appear to be a better choice for it to be an attractive investment. The price now is discouraging, but the reason we are open to being discouraged is because we don’t have the track record to provide corresponding levels of confidence.

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One thing that I’ve seen from Saul, over and over, is that valuation doesn’t play in to his methodology. This is different from several other prominent posters on this board where valuation is directly considered. As a reformed value investor, valuation is always present in my mind as I consider Saul stocks.

Everyone does valuation but there are many ways of doing valuation. One way is to study the financial statements (FA), another is to study the business model and the competition, a third is to see what the market is doing (TA). If you are dealing face to face with a seller you can haggle but when buying stocks in the open market all you can do is take it or leave it. When facing an IPO you have no way of knowing if Mr. Market is being reasonable or crazy, specially with growth stocks which are harder to value than dividend paying stocks. Additionally, at IPO the sellers are angel investors and venture capitalists and they like to IPO during market bubbles to maximize their profits. “Valued clients” of brokers get an allotment of shares at a good price, better than you’ll get in the open market. To me buying an IPO is gambling because there is no track record to look at.

Ask yourself, “What’s the rush?” If the business is any good you have several years to make a good profit so why not wait until Mr. Market settles down and you have more data to make your valuation by whatever method you use.

Denny Schlesinger

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AND, we’ve never listened to management speak on a conference call to get a sense of who they are, and how they speak to us, and to WS analysts.

Wasn’t the CEO the former CEO of Service NOW? He has a strong track record and I would think you could go back and check some of those transcripts and calls. I understand the rest of the management team is also pretty seasoned and professional. I know it isn’t a complete solve to this dilemma but it should help.

Ant

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Yeah, SNOW is crazy expensive. After the S-1 came out, I created the following table:


Price	MarCap	NetCash	EV	EV/TTM Sales
50	12226	887	11340	28.2
75	18340	887	17453	43.3
100	24453	887	23566	58.5
125	30566	887	29679	73.7
200	48906	887	48019	119.3
227.54	55640	887	54753	136.0

The last line is the current price (9/17/2020 close). I would have bought a bunch below $100 and a little at $125. The current price is out of reach for me. Saul said it well: compare SNOW to your next best alternative investment. Well, all of my existing stocks are better than SNOW at SNOW’s current price so I won’t buy.

I think SNOW’s revenue will be at least a double in a year; its revenue growth is still very high, but it’s not completely clear if revenue is decelerating: 154.6%, 139.1%, 149.0%, 120.7% (most recent quarter is the last one). From the last 4 quarters, I don’t see a clear trend. I think that revenue will at least double over the TTM’s revenue, but it may do better than 100% growth. So, if I paid $125 today then the EV/Sales drops from 74 to 37. If the forward growth is higher than 100% then the EV/Sales drops even further below 37. If I am looking to buy shares at a “non-silly” valuation and if I am willing to pay $130 today for some shares, then the price that I am willing to pay will rise as time elapses. Basically, the price that I am willing to pay will rise by $10 per month. So (assuming that revenue growth progresses at at least 100% annualized) I will be willing to pay $130 today, $160 in December, and $190 in March. That’s how I am looking at it.

Chris

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So … I’m new to investing, from the perspective of I am becoming more directly involved. I have four accounts, two managed accounts, that I will retain as managed, and two newly created unmanaged accounts, both of which I’m using for my own investment education purposes. That being said …

I purchased SNOW. I didn’t pay out on the super high end, nor the initial levels. I’m right in the middle. I believe in the overall company and platform. Could I have waited to purchase at a lower price, absolutely. That’s what I learned as part of this new independent investor experience. Now, I don’t buy into IPO’s lightly. I happened to have picked SNOW because I believe in big data, data analytics, and data cloud infrastructure as future critical.

That being said, amidst all the financial/numeric analysis, has anyone thought about …

  • Why did Berkshire and Salesforce buy into this company? Was it for immediate or long-term gain? Or both, would be a realistic assumption, however, what did the investors leave on the table, as we saw?

  • I think about all of the customers that Berkshire and Salesforce have … what opportunity exists for the three organizations, as a conglomerate, to benefit from this “union”? Are all of their customers low-hanging fruit customers for Snowflake? Would that make Snowflake more sticky?

Basically, what I’m trying to convey here pertains to my intangible and non-monetary analytical aspect of one of the alternative monetary reasons why I purchased SNOW. Long-term opportunity and potential.

Feedback welcome.

Why did Berkshire and Salesforce buy into this company?.. Feedback welcome.

Berkshire bought several days before the IPO (when they were still talking about an IPO at $75-$85) presumably at $80 or less, to an absolute maximum of $120, not at $240 where it actually opened after IPO-ing at $120. Giving Berkshire a cheap price to get them in was good strategy for SNOW as it added to the IPO frenzy.

Saul

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Saul,

Thank you greatly for your feedback. Please note, I am totally learning here …

Based on your response, are you saying/inferring that SNOW one-up’d the likes of Berkshire and Salesforce for SNOW’s financial benefit, and/or that if so, the primary investors bought into it, only because/knowing they would benefit?

What about the fact that both parties, Berkshire and Salesforce, have clients that would potentially benefit (and they would, too, primarily) from promoting their new data storage and analytics partnership with Snowflake?

Second, I learned from this experience, basically that the retail investor is most vulnerable as part of the IPO process.

Best regards,

LMC

Berkshire bought several days before the IPO (when they were still talking about an IPO at $75-$85) presumably at $80 or less, to an absolute maximum of $120, not at $240 where it actually opened after IPO-ing at $120. Giving Berkshire a cheap price to get them in was good strategy for SNOW as it added to the IPO frenzy.

Brilliant observation! What’s good for Berkshire at $80 must be good for me at $240! :wink:

Why did Berkshire and Salesforce buy into this company?.. Feedback welcome.

Since my investing style differs from Berkshire, I don’t care why Berkshire bought. I have no clue why Salesforce bought. One of the useful ideas I picked up from reading world class investors and world class speculators is not to buy stock tips. Buying because someone else bought, no matter how distinguished, I still consider a stock tip. For me the most important issue is the business model and that includes the potential TAM. Why is Apple a trillion dollar company? Because it sells to the whole world! Who does SNOW sell to? A few thousand or tens of thousand corporations. While SNOW’s deals are much larger, Apple’s TAM exceeds SNOW’s.

Lastly, how does SNOW compare to my current positions? No matter how brilliant SNOW might be, it has to be better than my current holdings to switch. Saul has made the same observation.

Denny Schlesinger

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Thank you, Saul and Denny. I appreciate the exchange and investment wisdom. LMC

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I freed up some cash from other investments and did a lot of research on SNOW before they went public this week. Ended up passing on buying in as I do not see this company as vastly superior to other SaaS companies followed on this board. As pointed out by others the current price puts them in a completely different league for valuation.

Notice most people are measuring valuation against sales and Snowflake is spending more than any other SaaS company as a percentage of revenue on sales. This is possible because of their net retention rate and superior product, but still wondering if their growth is sustainable without a massive sales spend. They also spend a lot on R&D compared with competitors.

Have some concerns about Capital One as 11% of revenue. Would like to see other large enterprises having this big of a spend. Wondering if Snowflake’s target market is overly focused on legacy systems moving to the cloud. Would prefer to see tech companies as the biggest spenders like the way that Fastly has Shopify and TickTock.

Margins are in the 60% range, coming up from 48% a year ago. The margins are lower than other competitors because they are running on the public cloud rather than in their own data centers. Many of the other companies are this board are have their own data centers and show much better margins, despite data center spend impacting margins.

The path to profitability for Snowflake is much less certain than with Zoom, CrowdStrike or Datadog which are already making positive earnings. For Snowflake to become profitable they will need lower expenses, increase margins, and continue landing/expanding perfectly. With a price/sales over 100 currently, the risk/reward ratio is massively skewed on the risk side.

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What is the criteria for “silly valuation”?

Asking a “Silly Question” and not bothering to read what’s already been said.

End this thread. NOW! Please!

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