by maxprtr
Summary: I know you don’t want to read. So in short, $SNOW has risen rampantly recently and become a bubble. People only see the headline revenue growth without noticing its declining growth rate, declining NVRR, significantly worse-than-estimate EPS, below-average guidance, and intensifying industry competition. Among all the companies with 50+B market cap in the US stock market history, none of them has come even remotely close to $SNOW’s INSANE valuation.
Position: 12/18 350P, 1/15 300P, 5/19 250P.
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2020 is coming to an end. This year we have witnessed the almighty power of retail investors — buying blindly after reading just headlines; following 18yo investing “gurus” on Twitter, TikTok, or StockTwits; and riding pump-and-dump schemes trying to take advantage of greater fools. Against this backdrop, we managed to create a bubble as big as $SNOW. Now trading at $113B, $SNOW’s current valuation dwarfs other tech firms at the height of the dotcom bubble in 2000.
Why Are People Buying $SNOW?
$SNOW reported earnings for the first time last week. Its result was slightly upbeat, although I would rather call it mixed. However, retail investors do not care about the actual state of the company. The only thing that matters is how the news headlines are reporting it. Since headlines read “$SNOW Q3 revenue growth over 100% yoy”, people have now started buying fearlessly, without realizing how much of a bubble $SNOW has already become.
What the Headlines Do Not Tell: the Ugly Facts behind $SNOW’s Valuation
1. $SNOW’s revenue beats estimate, but not by much, and it’s far from a surprise
Q3 revenue is 159.6M, which beats estimate 147.1M by only 8.5%. Yet, stock price has risen 40+%, from 290$ to 400+$. Something does not add up here. $ZM rose about that much after its Q2 earnings. but $ZM’s revenue beat estimate more than 30%? Moreover, $ZM gave up most of that gain just a couple of days later. And now after 3 months, it is still trading lower than back then. Don’t you see that $SNOW’s jump is a lot more overdone?
2. $SNOW’s revenue growth rate and net revenue retention rate is already DECLINING.
It’s true that $SNOW’s revenue grew more than 100+% yoy this quarter. But if you expect its revenue to keep doubling forever, you would be completely delusional.
$SNOW’s revenue of fiscal year ending Jan 2019 and Jan 2020, was $96.7M and $264.7 million → 174% yoy growth.
$SNOW’s revenue of six months ending Jul 2019 and Jul 2020, was $104.0M and $242.0M → 133% yoy growth.
And now $SNOW reports Q3 yoy revenue growth 115%. Do you recognize a trend here?
174% > 133% > 115%
Its growth rate is DECLINING, people! It cannot keep growing 100+% over the next few years. $SNOW grows fast right now because its current revenue is too small, smaller than 1/200 of its market cap. As the company matures, it’s almost certain that growth will slow down.
Same story with the net revenue retention rate (NVRR), which the SaaS industry uses as a valuation matric. Retail investors read the headline and see a 162% NVRR, thinking “this must be a buy”. But back in Jan 2020, NVRR was 180%. As of Jul 2020, it was 169%. And now, it is 162%. 180% > 169% > 162% right?
3. Positive revenue growth does NOT mean $SNOW is making more money. In fact, $SNOW’s EPS is 3 times WORSE than estimate. $SNOW is not expected to make money even in 2023.
Q3 EPS is -1.01$ vs estimate -0.26$. $SNOW is LOSING 3 times more money than expected to realize that revenue growth, which beat estimate by only 8.5%.
3 TIMES EPS miss → just 8.5% revenue growth beat? Does that really sound positive to you?
As I quote the company’s SEC filing again, “We have incurred substantial losses during our history, do not expect to become profitable in the near future, and may never achieve profitability.” I really wonder all this extreme hype surrounding $SNOW is based on what? Are retail investors really seeing something that even the company itself does not see into the future? Or is everybody just dreaming?
Goldman Sachs estimates $SNOW will still be bleeding money even in 2023.
4. Q4 revenue guidance is BELOW AVERAGE estimate
For Q4, $SNOW projects $162-$167M in revenue, which is below the average estimate $166M. This is largely the reason why $SNOW’s price was falling at first after earnings. As the more rational $SNOW investors are selling their shares, bagholders on Twitter, TikTok or whatever, start to pump the stock using cherry-picked positive numbers.
Some analyst says the guidance “could be” conservative. Conservative based on what? Based on the fact that you are long so you want to pump the stock? With the declining growth rate as we have seen, the guidance makes perfect sense.
Another cloud company, $SPLK also reported Q3 revenue this week. It missed estimate by 9% and its stock dropped 23%? Was its estimate also “conservative”, Mr. analyst?
5. $SNOW’s market cap is even higher than its Total Addressable Market (TAM) of 2023.
According to IDC, the markets for Analytics Data Management and Integration Platforms and Business Intelligence and Analytics Tools, which $SNOW addresses, will have a combined value of $56 billion by the end of 2020 and $84 billion by the end of 2023. Let’s not talk about how $SNOW’s market cap is even larger than the its entire market in 2023. But how much of market share can $SNOW realistically achieve?
Its FY2021 revenue estimate 578M is only about 1% of the total market. For SNOW’s market cap to make sense, people are expecting it to own at least half of market share of the entire market in the long run. Is that possible? Cloud is an industry with ever tougher competition. You expect $SNOW to grow its industry presence by 50 times, while other competitors: Amazon, Google, Microsoft do nothing, sit idly and watch? There will be more discussion on this later.
6. $SNOW’s CEO’s compensation is worth MORE than the company’s revenue!
CEO Frank Slootman now collects $108M worth of compensation every month. That’s 324M per quarter, but the company’s quarterly revenue is only 160M? I know the compensation is not all cash, but linked to RSUs and options. Yet still, doesn’t it ring an alarm bell? At what other company can a CEO be paid twice the entire company’s revenue? And it’s REVENUE, not profit! The company has no profit yet. Doesn’t this illustrate how insane the company’s valuation has become?
How Does $SNOW Compare to $ZM, $TSLA, and the Dot-com Bubble
1. vs Analysts’ price targets
I personally do not trust analysts’ targets. This year, analysts are handing out positive ratings like candies. We have seen crazy sh*t targets like a 79$ for $NKLA. Lol. And moreover, $SNOW’s IPO have pretty much everybody on the street as its underwriter. This make the banks more biased to give a buy rating.
Even so, $SNOW’s current price is still much higher than even the most bullish analyst. Analysts want retail people to buy blindly. They just did not expect people could go THIS blind.
JP Morgan target: 250$ (36% down potential)
Morgan Stanley: 265$ (32% down potential)
Credit Suisse: 265$ (32% down potential)
Goldman Sachs: 308$ (20% down potential)
2. $ZM
If you are that impressed with SNOW’s 100% revenue growth, you probably forgot about $ZM’s 367% yoy growth this quarter? Not only did that beat estimate by 12%, its EPS also beat by over 30%. Even so, $ZM’s price fell after earnings because it didn’t live up to people’s expectation. So what are people expecting for $SNOW’s next quarter? $SNOW’s market cap is now almost as big as $ZM’s, although with only 1/5 revenue, 1/3 growth rate, and a negative EPS.
If you think $ZM is trading cheap because vaccine is coming and WFH is ending, but $SNOW is trading expensive because WFH does not have an impact on $SNOW’s business. Think twice. WFH has accelerated cloud adoption. As people cannot go to office to maintain on-premise data storage solutions, companies were forced to embrace the benefit of cloud. Same with video conferencing, after WFH ends, growth in cloud business will decelerate.
When the vaccine news came out on Dec 9 and Dec 10, both $ZM and $SNOW fell significantly. This proves $SNOW also belong to the WFH stock category. With vaccine FDA approval on near horizon, $SNOW is destined to fall again.
3. $TSLA
I don’t have a view on $TSLA, I just want to compare. There are some people who think $TSLA is overvalued. I guess they never heard about $SNOW. $TSLA’s valuation is nothing when compared to $SNOW.
- $TSLA’s P/S ratio is smaller than 20. While $SNOW’s is close to 200. 10x as big.
- $TSLA’s P/E ratio is positive, with forward 12M P/E at 162. Whereas $SNOW will be bleeding money even in 2023.
- $TSLA has a chance to become the leader in EV industry, like an iPhone among all mobile phones. Can $SNOW become the leader in the cloud space? Highly unlikely.
- EV market annual growth rate is expected to be 21% Source, while IDC forecasts SNOW’s industry to grow only 15% annually.
4. The dot-com bubble
Through the stock market history, no company at $SNOW’s size has been trading at such high valuation multiples. Among all the companies with a 100+B market cap… You know what, let’s make our comparison even broader, let’s look at all the companies larger than $50B. Amid the 2000 tech bubble, $CSCO was trading at the highest P/S ratio. On Mar 22, 2000, $CSCO’s P/S reached all time high of 57. It’s been 20 years now. After the bubble popped, CSCO’s price today is still more than 40% lower than 20 years ago.
Now you would argue, $CSCO and $MSFT etc. are big mature companies, how can you compare a growth company like $SNOW with them? Well, 20 years ago, $CSCO and $MSFT were growth companies too. A lot of the “growth” companies back then, do not even EXIST anymore. Do you really want to compare $SNOW with those bankrupted companies?
Microsoft’s highest P/S ever: only 29, reached during dot-com bubble.
Google’s highest P/S: 22 in 2005.
Facebook’s highest P/S: 22.2 in 2014.
Apple’s highest P/S: only 8, reached in August this year. (Yes Apple’s P/S was even lower when first iPhone was launched)
NO BIG TECH HAS REACHED A BUBBLE OF THIS SCALE EVER. Like, ever.
The Myths People Are Spreading about $SNOW
MYTH 1: Warren Buffet invested in $SNOW, which means you should buy too.
BUSTED! Warren Buffet is a value investor known for his reluctance to invest in technology. Of course he did NOT participate in $SNOW IPO. Oh dear god, please wake up, people! Buffett’s deputies, namely Ted Weschler and Todd Comms, invested in $SNOW, not Warren Buffet himself!
And now people are using this as a propaganda to pump $SNOW. “Warren Buffett bought, you should buy too!”
Yet I still do not understand the logic here. Berkshire bought $SNOW when it was 120$ per share, probably expected to make like 30%, 50% from their investments. And now, you crazy retail people are buying $SNOW at 400$ per share, more than 3x IPO price? What? So your investment logic is: Anything Buffett buys, you would buy it at 3x price? Oh in that case, if I am Warren Buffett, I would just buy everything in sight, then there will be some retards willing to pay me 3x price I paid. Lol, I just discovered an infinite money making machine.
If you believe in Berkshire, you should YOLO your money in $BRK/B, not $SNOW! Or alternatively, you can read Berkshire’s 13F filing which lists most of its investment. You should start buying every single stock in that list until it goes to 3x current price. Why don’t you do that?
MYTH 2: $SNOW has technology that nobody else has and will achieve monopoly in the cloud space.
I fully expect there will be $SNOW cultists arguing in the comment section “nobody competes with $SNOW because they are the best. You don’t understand its business.” blahblah. So, I hereby quote the company’s own words.
$SNOW competes with “1. large, well-established, public cloud providers that generally compete in all of our markets, including AWS, Azure, and GCP*; 2. less-established public and private cloud companies…; 3. other established vendors of legacy database solutions or big data offerings; and 4. new or emerging entrants seeking to develop competing technologies*.” The company recognizes “The markets in which we operate are highly competitive. Many of our competitors have substantially greater brand recognition, customer relationships, and financial, technical, and other resources than we do**.**”
The biggest difference between Snowflake and others that I see, is that $SNOW bills customer per usage, while others often adopt fixed contracts. Other than this, there may be a couple more of data types supported, or a bit more optimization here and there. I don’t see anything game changing with Snowflake that other competitors are unable to offer. Plus, the competition is getting real intense. Just days ago Microsoft announced the launch of Azure Synapse to compete with Snowflake and alike. Source
And moreover,
“We currently only offer our platform on the public clouds provided by AWS, Azure, and GCP, which are also some of our primary competitors. There is risk that one or more of these public cloud providers could use their respective control of their public clouds to embed innovations or privileged interoperating capabilities in competing products, bundle competing products, provide us unfavorable pricing*, leverage its public cloud customer relationships to exclude us from opportunities, and treat us and our customers differently…*”
This is the RISKIEST part of $SNOW’s business. $SNOW is running its cloud on the infrastructure provided by its COMPETITORS. Huh? Isn’t it the same as exposing your biggest weakness to your rivals? Even if $SNOW manage to grab a much larger market share and become No.1 in the cloud space, if Amazon or Microsoft find $SNOW a threat and want to hamper its growth, they can simply stop offering their infrastructure or raise the price? If that happens, how is $SNOW going to survive then? $SNOW’s lifeline is literally in the hands of its biggest competitors!
If you are buying $SNOW at current valuation amid the ever-intensifying competition in cloud space, fantasizing how $SNOW will beat everybody else, then I think you are kidding yourself.
Some Final Words
I am not trying to convince you to go short, you are more than welcome to pump the price higher, then I can add some more puts. I just hope people can reflect on their rationale of buying $SNOW at 400$ per share. Do you really have a logical point, or are you just blindly following some random headlines? It’s your own money. Make your own decision.
FYI, yes some others have mentioned on this sub that $SNOW’s lockup will start to expire in a week’s time. That is correct.
Finally, this will be my last DD on wsb. Thank you all for reading my past posts and I hope you liked them. I even got some followers lol which I didn’t notice until recently. Again thank you very much.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.