Catching snowflakes is an enjoyable experience, but it can also make good money this week. By now we can conclude that 2020 has been a bumper year for cloud stocks. Berkshire Hathaway (BRK.A Stock Report) and Salesforce (CRM Stock Report) backed Snowflake Inc. (SNOW Stock Report) surged 112% to $253.93 after hitting a high of $319 during the first day of debut.
This came after many investors went scrambling for a slice of the hottest tech stock this year. The maker of the database program doubled its valuation during its first day of trading from about $33 billion to just under $71 billion, making it the biggest IPO ever for a software firm.
With Snowflake’s impressive growth track record and interest from Warren Buffett, investors might want to include SNOW stock in their list of top tech stocks to buy moving forward. Judging from its stellar performance during its first day of the public debut, there are good reasons for all the enthusiasm. But the big question here is, should investors chase SNOW stock at such a high valuation? Read on.
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Before deciding whether to invest in SNOW stock, let’s take a look at some numbers to see where the company stands. If you have read Snowflake’s S-1 filing, the first thing which probably caught your attention would be its ridiculous growth rates. Snowflake’s 133% growth over the six months of 2020 and 158% net retention rate are terrific, to say the least. After yesterday’s surge, Snowflake is trading at a whopping 175 times trailing-12-month sales, putting other enterprise software stocks to shame. However, with existing clients ramping up their spending on Snowflake’s service, the company may just grow into its valuation. What looks expensive right now might not look so bad in just a couple of years.
If you have been actively searching for the best stocks to buy, you would know that cloud stocks have soared to all-time high valuations. So, you could say that Snowflake has come to the market right when it is the hottest. But guess what, it didn’t melt in the face of the heat. If anything, it has gotten investors all the more excited. But if you are looking for a quick flip, tread carefully. On the other hand, if you’re planning to buy and hold it for the long term, then, by all means, feel free to take a chance at this red hot company.What Does Snowflake Actually Do?
Well, I’ll admit I am not an IT expert here. Snowflake is a cloud-native data warehouse provider. That sets it apart from the likes of Oracle Corp. (ORCL Stock Report). Snowflake offers database solutions for storing data and running queries on those data. Unlike the competition, users do not have to pay upfront, and services can be scaled up or down in a flexible manner.Source: Snowflake
This flexibility extends to its pricing as well. The firm boasts 3,100 customers, 56 of which were each responsible for generating around $1 million in revenues within a 12-month period. While big cloud providers like Amazon.com Inc.(AMZN Stock Report), Microsoft Corp (MSFT Stock Report), and Alphabet Inc. (GOOGL Stock Report) have similar offerings, Snowflake prides itself as being the standalone company which can run on all of these cloud platforms.Cloud Stocks Could Still Move Higher Despite The Recent Pullback
In the cloud space, the pandemic has acted more as a tailwind than a headwind. There’s a long list of cloud stocks that have been dominating the market of late. No doubt, unless there’s a safe and effective vaccine, chances are today’s new normal will stay for some time. For this reason, the recent pull back could provide the opportunities for a quick flip. If you, like many other industry experts, believe that the cloud space will continue to thrive even after the pandemic, you should pay close attention to this space over the next decade.
Now, Snowflake’s IPO might have overshadowed JFrog’s IPO (FROG Stock Report). JFrog makes software for developers. It’s worth noting that FROG stock has leaped 47% to $64.79 after hitting a high of $77 per share during its intraday.
JFrog stock raised $504 million. Both SNOW stock and FROG stock priced above their expected ranges. Meanwhile, Tencent-backed online real estate platform KE Holdings (BEKE Stock Report) which debuted last month, also broke out yesterday. The rising tide in the tech space seems to lift all boats.
It’s not always the case that IPOs open for trading much higher than the offering price. Of course, Snowflake’s credibility is further boosted with Warren Buffett and Salesforce as their shareholders. But investors shouldn’t be buying SNOW stock merely because they are. So when the stock eventually takes a breather, you won’t be panic selling which would result in losses. Instead, take some time to study the company’s product, the potential, and scalability of the business to make a more informed decision.
Long story short, Snowflake is unique because it was the first company to optimize its data warehouse for fast cloud computing. This allows easy interoperability among the major cloud companies, notably Amazon, Microsoft, and Alphabet. If you have missed the stock like many other potential investors, chances are you could buy it at a lower price in the near future once the heat subsides. But perhaps you are wondering whether to buy Snowflake stock at this price or not. Well, I can’t speak for you, but personally I would take a deep breath before coming to a decision.