Thoughts on SNOW

Investment Analysis Clubs Saul’s Investing Discussions
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In September of 2020 the board was debating whether or not SNOW would be a good investment as a new IPO. There was a lot of handwringing about the valuation - which was well over 100x P/S at the time. Should we invest in something that was obviously a great company with incredible metrics, but at such an incredibly high initial valuation?

There are times where the valuation is so egregious that the risk is not worth the potential reward. Any minor deviation from expectations can make it crash. Hard. An unexpected world event (war) can remove liquidity from the market and cause all stocks to fall - but especially the ones at ultra high valuations.

What are the main lessons to be learned from SNOW IPO days? IMHO, don’t get caught up in IPO FOMO. It is a rare IPO price that goes straight up and never gives a better buying opportunity. SNOW went straight up initially - from $230 to $400 in 3 months. Then it came all the way back down to $200 at about the time of the IPO lockup expiring. Look at insider sales starting in March of 2021. Look at a bunch of IPO charts from the last few years, and most of them show this major drop when the lockup expires - about 6 months after IPO.

Another more recent observation (not related to the IPO) - look at insider sales from December. The CEO and CFO sold 1M and 700k shares on 12/15. BY FAR the largest insider sales so far - and it’s not even close. The value of those sales was $340M and $240M. The stock was around $340/sh at that time. Making decisions based off insider sales is notoriously problematic - but sometimes the sale is so huge that it should at least make you have some extra caution. And to see both the CEO and CFO make that large of a sale on the same day - alarm bells.

https://www.cmlviz.com/stocks/SNOW. I use this site to look at valuations. TTM P/S for SNOW is 45. Current fiscal year forward P/S is 25, and next fiscal year forward P/S is 16. If they exceed estimates, which is likely, those forward estimates will be even better. I think the risk/reward is pretty good at this point.

FYI - I am long SNOW. I have been watching and waiting since the IPO. I started buying very small amounts a couple months ago, then increased my buying after the recent ER. I am currently ~ 80% cash in my growth stock account.

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I don’t own SNOW, but I think there’s a lot to say here, so I’m going to reply to your post perhaps too thoroughly. I’m not trying to pick it apart! Just wanted to address some of your potential lessons re: how the stock has done, and attempt to (re-)focus on the company.

Don’t get caught up in IPO FOMO…
I agree that FOMO is a bad thing, but in ancient times before 2020 there are plenty of examples where stocks were never again as cheap as the day they IPO’d. I feel like there’s a time when that will change, so your lesson is good maybe for now – until it isn’t, because at some point IPO’s won’t be as hyped as they were in 2021. (Actually I feel like I haven’t even heard of many recently.)

Another more recent observation (not related to the IPO) - look at insider sales from December.
I wouldn’t. A lot of times you can find insiders selling at the absolute wrong time, or even buying at the wrong time! Look at Moskovitz and Asana (ASAN).

There are times where the valuation is so egregious that the risk is not worth the potential reward. Any minor deviation from expectations can make it crash. Hard. An unexpected world event (war) can remove liquidity from the market and cause all stocks to fall - but especially the ones at ultra high valuations.
Yes, but…be careful to learn the right lesson, here. Stocks can get crushed whether the valuation is low or high. The answer is certainly not to own lower quality businesses where the valuation is lower! So what can you do? Go to cash or partially to cash, I suppose. But then you need impeccable timing. I built up more a larger-than-usual cash position in 2021…fat lot of good it did me, haha. So on valuation (and market cap), maybe the answer is balance – don’t completely ignore them, but realize you can only control so much.

THE MOST IMPORTANT LESSON TO KNOW (but which has nothing to do with the stock’s journey)
As Saul has taught repeatedly, understand how the business is doing. This is the north star, because even when the voting machine is crushing all stocks, or all software stocks, or all hypergrowth stocks, this is how we sort the wheat from the chaff. If we mess this up, as I did with Amplitude, we will get crushed – it’s down 81% from its high. If we get this right, we’ll be rewarded, like with Datadog which is “only” down 36% from its high. That doesn’t sound great, but it’s better that I’m doing overall! And more than that – by seeing how well (better and better) the company is doing, we know that if/when its stock price falls, it is only becoming more and more of a bargain going forward. So what about SNOW?

How is Snowflake’s business doing? Really well! Is it likely to grow at 100% going forward? I don’t think so. But is it likely to grow at 80% this year and then 50%+ for many, many years? Yes! And is it likely to throw off massive amounts of cash? Yes. And is it likely to be a leader (really THE leader) in its space for years to come? Looks like it. I think that means we can say (as I did with DDOG) that if/when its stock price falls, it is only becoming more and more of a bargain going forward. SNOW is 55% off its high, so even though it fell from a much, much higher market cap than DDOG, it still hasn’t been an AMPL situation or even close. Perhaps it has just become more reasonably priced – might be approaching “bargain.” I don’t know. And (just as with Datadog, I didn’t know it was going to fall – and in another world, it wouldn’t be at these levels today, so again I think it’s important that we don’t learn the wrong lesson.

Why don’t I own it? I like others better. But who cares? Whether I or you buy it and when and how much are all off topic, really. (And we’ve probably veered into that too much lately.) That all depends on your style and how many positions you want to hold and how much you’re willing to concentrate into your favorites.

But we can all agree SNOW is a great company that will eventually be worth more than it is today.

Bear

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“in ancient times before 2020 there are plenty of examples where stocks were never again as cheap as the day they IPO’d”

Valid point. I agree - my observation was specific to the last few years. I have not looked, but I would bet it also applied to the .com time period. In times of market euphoria.

“Look at Moskovitz and Asana (ASAN)” – regarding insider sales.

Maybe I’m missing it, but it looks like his only sale was in conjunction with the IPO. 900k share sale when he still held ~ 20M shares after the sale. 5% sale - not the same as Slootman’s December sale IMO. I do understand your point, and I did say that insider sales are not reliable on their own for making decisions, but I disagree with the conclusion that they should not be looked at or considered.

“So on valuation (and market cap), maybe the answer is balance – don’t completely ignore them, but realize you can only control so much.”

Yes!!! Everyone has to make their own decisions regarding when is the right time to pull the trigger. I believe you stayed out of DDOG for a long time due to valuation concerns. I could have possibly missed out on an amazing investment (SNOW) by waiting so long - that is the risk. I am just trying to bring up a slight counter-perspective to the idea of ignoring valuation altogether.

AND… when great performance aligns with better valuation… best of both worlds = pull the trigger. After 1.5 years of great performance, we have the chance to buy SNOW at prices lower than where it IPO’d. The risk/reward is significantly better.

There was a ton of discussion here about SNOW valuation when it IPO’d. I think most of us did not buy in at that time due to the extremely high valuation - even though the company performance was better than most others. I personally think our instincts were right and we should learn from it.

Thanks for the respectful dialogue.

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“Look at Moskovitz and Asana” - regarding insider sales

Hi Analog, you got that wrong. What Bear said was:

“or even buying at the wrong time! Look at Moskovitz and Asana”

Now insiders making big buys is supposed to be at least ten times more valuable an indicator than insider sells. At least! Because insiders sell for all sorts of reasons, but they only buy for one reason: they think the price is going way up! Well, here was the headline from Feb 14, this year, just one month ago:

Asana CEO Moskovitz Buys Another 1.25 Million Shares, Boosts Spree to $1.1 Billion.

On that date Asana closed at $68.66. On Friday, four weeks later, it closed at $34.56. It lost about 50% of its value in a month after that billion dollar buying spree by the CEO. If a CEO could get BUYING so wrong, how can you pay much attention to sales?

As an aside, you can go back to when Amazon was at $50 or below (its almost at $3000 right now), and even back then you could find at least 15 to 20 insider sales every month, every month, every month, right up to the present. I wouldn’t make my decisions based on insider sales.

Saul

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Saul - you are correct. I did not read Bear’s comment correctly on insider “buying” vs “selling” with Asana. I screened for selling history only and did not see all the buys. My comment about Asana was wrong.

Thanks for politely correcting me.

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Thank you Bear! You are one of the reasons that I wish I had more time to participate in this board lately. I have been a quiet lurker as of late, just not much of a poster. But it is posts like this one that pull me off the bench and get me in for a couple minutes of garbage time. Thank you for being a Saul Investing Discussions NORTH STAR!

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I wouldn’t make my decisions based on insider sales.

There is a disease in the valley. They are all justifying it because “everyone is doing it”. Buffet never did this. Musk did not do this till recently.
It is especially objectionable that these early growth companies CEOs are relentlessly selling.
They are all hedging. These C-Suite are awarding themselves hundreds of millions worth of stocks every year and turning around and selling it.

Where is the conviction ? Stop using justification of taxes, personal needs and diversification.

Do your own due diligence.

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SNOW is a great business. I don’t think anyone would argue that.
SNOW is also growing fast and dominating big data/data warehousing/analytics. I don’t think anyone would argue that either.
SNOW will grow for many years to come. Most would agree.

The question then is - Is SNOW attractively valued ?
Note that Berkshire bought $800m worth of SNOW AT IPO ($120), today’s price is $166.

For me, relative comparisons helps with a reality check.
Redhat was acquired by IBM and Activision was recently acquired by Microsoft.
The purpose of this is not to compare the businesses but a back of envelope sanity check about valuation.


Company	Market Cap	Revenue	Recurring Rev	Growth Rate	Net Income	
----------------------------------------------------------------------------------
Snowflake	50B	1.1B	1.1B	**106%**	NA	
Redhat	        34B	3.4B	2.9B	15%	0.25B	* subscription revenue was $2.9B, 88% of total revenue
Activision	69B	8.8B	6.5B	9%	2.7B	* subscrtiption revenue was $6.5B, 74% of total revenue

Few apparent observations
a) SNOW is growing faster (106% to 15% for Redhat and 9% for Activision) from a low base.
b) Redhat and Activision were profitable when they were acquired.
c) Surprisingly, RedHat and Activition, both has healthy recurring revenue (subscription).

Snow has one advantage over the other two companies. SNOW has an internal flywheel built in. It does not need to add new clients or create a new product to sell.

More data → More workloads → More analytics/AI → More compute/storage → More revenue → More data
Rinse and repeat.

I have used Snowflake and it is a terrific product. We had moved about 5% of our data and workloads but it was apparent that the other 95% is progressively going to Snowflake in next 5 years
It’s roadmap is also impressive. They are trying to build a Analytics and AI eco system on top of AWS/Azure.
I always wanted to buy SNOW but thought it was expensive. It is in my price range now and I am starting to accumulate.

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