The year has had its share of tech initial public offerings, and usually, these tech stocks soar after their IPO. Snowflake Inc (NYSE:SNOW) surged past its IPO price of $120, although since then, it has been range-bound in the $240 to $250 area. Plenty of experts are touting other software stocks instead of Snowflake, so does that mean it’s fully valued? Analyst commentary on the company is mixed.
At least nine analysts initiated coverage of Snowflake Inc with the equivalent of a buy rating, while at least seven initiated with the equivalent of a neutral rating, illustrating just how split the views are on this stock.
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Strong numbers for Snowflake Inc
Analyst David Hynes Jr. of Canaccord Genuity is one of the analysts who have a hold or neutral equivalent rating on Snowflake stock. In a note today, he pointed out that the company has strong numbers. Its product has been on the market for just six years, but the company has a more than $530 billion revenue run rate. Hynes expects the revenue to grow 113% this year and more than 90% next year.
He added that the average Snowflake Inc customer is spending about 60% more with the company each year. Hynes expects the company to reach sustainable profitability in its free cash flow within six quarters. He describes Snowflake as "one of the most impressive stories we have come across in our 15 years covering the space."
Hynes also had an explanation for why Snowflake Inc seems to have topped off. He said investors pressed its valuation to 47 times EV/ R on estimated 2022 numbers, which is an extreme that's rarely seen. He added that there may be logic to that optimism because Snowflake will probably be a much larger business in the coming quarters and years.
However, he also said that it feels as if Snowflake has "already pulled forward several years of value creation." For that reason, he tacked on a Hold rating with $250 price target. He believes the company's stock will remain range-bound until its fundamentals catch up with its shares.
Here's what else to like about Snowflake
Investors who are optimistic about Snowflake Inc have plenty of reason to be. Hynes points out that the company's asset is differentiated, as it has reimagined data management for the public cloud. Customers pay only for what they use, and the end-to-end functionality arrives in a unified platform.
Further, the data space is massive, as he estimates the total addressable market for the company at about $80 billion, and data creation continues to explode. He also noted that Snowflake Inc stands to gain market share from legacy incumbents with "complex and cumbersome deployments" and upgrades.
He also likes the company's management team as CEO Frank Slootman and Chief Financial Officer Michael Scarpelli previously teamed up on ServiceNow, making investors money in the process.
High-profile investors in Snowflake stock
One factor that may have influenced Snowflake's valuation is the fact that several high-profile investors have taken a stake. Perhaps the most notable is Warren Buffett's Berkshire Hathaway, which raked in $800 million on Snowflake's IPO.
Buffett's investment is particularly notable because historically, he has stayed away from tech stocks and IPOs. Berkshire has been investing in tech stocks occasionally in recent years, as some of his lieutenants have been believed to be involved in driving those tech investments. Buffett's Berkshire bought $250 million worth of Snowflake shares at the IPO price of $120 and another 4.04 million shares from another shareholder at the debut price.
In addition to Buffett, Salesforce's venture capital arm has also taken a stake in Snowflake Inc, as has Dan Loeb of Third Point, who disclosed a stake in the company in a recent portfolio update.