Everybody loves an exciting IPO, even now that a little bit of the bloom has come off the rose in the past month or so with the speculative tech stocks mostly dipping well off their highs, so this pitch from Alexander Green at the Oxford Club caught my eye — he’s got what he calls a “IPO Superstar” in mind, and he’ll tell you what it is (just as soon as you pony up $1,975 for a two-year subscription to his Insider Alert newsletter — there is a refund clause, but only after two years since you only get to request a refund if they don’t give you a chance for 20 100%+ gains over the full term).
So let’s see if we can figure it out for a somewhat lower price, shall we? I’m thinking maybe free-ish? That way you can think it over and get a little of that profit lust out of your head for a moment — if you’re like most people, if you don’t pay for a “stock tip,” you’re likely to consider it more rationally… if you pay $1,975 primarily just to learn about a hot stock, most folks will be predisposed to skip past any warning signs.
So… what is it?
Here’s some of the intro email that leads us into the Insider Alert promo…
“For example, it is widely known that the broad market has returned approximately 10% a year over the last 200 years.
“But since 2010, according to a study by Schaeffer’s Research, the average one-year return for a post-IPO stock was 22.3%.
“And many – like Tesla (Nasdaq: TSLA), Peloton (Nasdaq: PTON) and Moderna (Nasdaq: MRNA) – have done far, far better.
“However, I’ve recently uncovered a post-IPO stock that has as much upside potential as any of those three.
“In fact, I believe it has the potential to become the hottest stock of the next decade.”
So that’s today’s secret stock… and as is typical of a newsletter pitch, they do throw in some quotes from brand-name sources to let you know that Green isn’t just making this up…
“Barron’s reports that it’s ‘generating stunning growth.’
“Forbes says its ‘growth potential is staggering.’
“Fortune magazine believes the firm will ‘become a tech giant.'”
And there are a few other hints in there as well…
“Customers include 165 of the Fortune 500 companies… and 70% of the ultra-exclusive Fortune 10 companies. The best of the best.
“And company insiders agree. They are not just buying. Insiders have loaded up on these shares.
“Even Berkshire Hathaway Chairman Warren Buffett – who famously dislikes both IPOs and tech companies – made his first IPO investment since 1956 in this company….
“Sequoia Capital – the firm that backed Google, Apple, Oracle, PayPal and YouTube – invested $271 million in this new company.”
Ah… so that means we don’t even really have to check out the full presentation (though you can if you like), that’s actually enough clues to get us our answer. Thinkolator sez this is Snowflake (SNOW), which was indeed one of the splashiest IPOs last year, and which is releasing its key earnings report after the market close today.
So it’s hard to find a more precarious pick for the next couple hours than SNOW, at this point — it’s one of the most richly valued large companies in the world, it is growing at an incredible rate, and it is about to report its second quarter as a public company (they reported their third quarter in early December, which drove the shares to new highs, but the stock is now almost 40% below those highs).
What does Snowflake do? They’re essentially offering a data platform… here’s how they describe themselves:
“Snowflake’s founders started from scratch and built a data platform that would harness the immense power of the cloud. Thousands of customers around the world now mobilize their data in ways previously unimaginable with Snowflake’s cloud data platform — a solution for data warehousing, data lakes, data engineering, data science, data application development, and data exchange. Snowflake provides the near-unlimited scale, concurrency, and performance our customers in a variety of industries want, while delivering a single data experience that spans multiple clouds and geographies. But our founders’ vision didn’t stop there. Our cloud data platform is also the engine that drives the Data Cloud — the global ecosystem where thousands of organizations have seamless and governed access to explore, share, and unlock the potential of data.”Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
There’s a nice little note from Sequoia Capital around the time of the IPO last year that sums up the story of building the business pretty nicely, too, if you want to get a little more background, and you can check out their latest investor presentations here if you want start to understand how the business works.
And yes, Snowflake was added to the Berkshire Hathaway portfolio last year, which was shocking to a lot of people — and those of us who follow Berkshire certainly noticed. This is what I noted about it at the time, in the October 2 Friday File:
Berkshire is now a large shareholder in SNOW, with 6.1 million shares that represent just over 15% of Snowflake’s outstanding shares (we only know this because investors who own more than 10% of a share class have to file their holding details) — they agreed to a substantial purchase as part of the IPO, about $250 million worth of the offering as well as 4 million shares the CEO wanted to sell, so they bought it at the IPO price ($120 per share), and enjoyed an immediate “pop” in the value of their holdings as the stock doubled that first day. SNOW did come back down for a bit, but as of now it’s still well above $200… which means that even for Berkshire Hathaway, this is a fairly meaningful position.
It’s not, however, 15% of the company — that would be worth something like $10 billion. This is more than 15% of the A shares, which is what were sold in the IPO. There are also something like 250 million B shares outstanding, close to 350 million fully diluted, and each of those is a “supervoting” share, giving those insiders and early investors ten votes per share and, most likely, perpetual voting control of the company (not unlike what we’ve seen with a lot of other tech stocks over the past decade or so). Berkshire’s stake of a little over 6.1 million shares is worth about $1.5 billion. That makes this Berkshire’s 18th largest common stock position, snugged right in there between Mastercard and Costco on the listing of common stocks that they own… meaningful, but a long way away from the huge positions ($115 billion in Apple, $25 billion in Bank of America, $20 billion in Coca Cola, etc.). Salesforce.com (CRM) holds a big stake in Snowflake as well, interestingly enough.
And while I imagine Warren Buffett was consulted on this call, given the size and the publicity they knew would be coming, it probably wasn’t his idea. Being relatively small, and in a very, very richly valued technology stock, that has all the hallmarks of being a decision made by one of his two investing lieutenants, and given the personal connections it was probably Todd Combs (who also serves as CEO of GEICO, a Snowflake customer). This is now the second fairly high profile IPO Berkshire has bought, the first was the Brazilian payments company Stone Co. (STNE) a couple years ago, and it’s a little jarring after the many screeds Warren Buffett and Charlie Munger issued against IPO investing, so I would assume that this is more of a vote of confidence in Combs than it is a real “let’s buy this” decision by Munger or Buffett — but you never know.
Snowflake’s operating performance has been spectacular, at least when it comes to growth, but it’s hard to imagine anyone taking it seriously as an investment at these prices — this is the only company I’ve noticed that’s trading at a richer valuation than Zoom Video (ZM), SNOW reported $242 million in revenue in the first half of this year (and a $171 million loss), so at that pace, even if we assume their current growth rate continues through the year, they’re trading at a nutty valuation. If the growth rate is consistent for the second half of 2020, then they should have about $340 million in revenue to close out the year, so that would be $682 million in sales for all of 2020… which means that SNOW right now is valued at almost exactly 100X expected 2020 sales. If they double their sales in each of the next two years, which is crazy but clearly expected, that would mean the stock is trading at about 30X 2023 revenues. You can make the argument that this is rational IF you’re pretty sure the growth rate will stay up there close to 100% a year, but if the growth slows down to something more like the “regular” companies in the sector, “only” 30-50% a year, it could take a considerable length of time to grow into that valuation.
Berkshire probably hasn’t changed its SNOW position since they participated in the IPO at $120, they still hold about 6.1 million shares as of the latest 13F (which covered December 31 positions), so their SNOW holdings are roughly the same size as their position in Amazon (AMZN), which are in the top 20-25 holdings but not in the top 15 (so they didn’t merit a mention in Buffett’s annual letter this past weekend).
The numbers for SNOW have already improved a bit since I penned those words in October, but, of course, with this kind of valuation it’s all about investor feelings about Snowflake’s future prospects, not about the actual financial performance in any given quarter. Whatever they say this evening to provide guidance or insight into the growth in 2021 will matter a lot more than whether or not they “beat” the estimates for the fourth quarter of 2020.
So it’s a tossup. Fantastic company, widely respected and followed, with a hugely admired CEO and leadership team and spectacular revenue growth that is expected to continue. They are not necessarily a “pandemic beneficiary” like a lot of the highfliers of last year, the move to cloud data and new and more intelligent data management are arguably steadier and more persistent trends than “work from home” or “shift to e-commerce,” so that gives some hope that the near-100% revenue growth rate will be persistent and not tail off for 2021, as folks expect the growth will tail off for similarly valued high-fliers like Shopify (SHOP)… but really, we don’t know. Not yet.
I wouldn’t try to talk you out of taking a small taste of Snowflake, it’s a great company, but in the face of their most important earnings report yet as a public company, and with a valuation that has bounced around dramatically and in a market that is really trying to figure out what to do with these high-growth story stocks, the uncertainty level is very high. I am really impressed with SNOW to the limited extent that I understand the business, but I’m not particularly inclined to jump aboard and take a chance a few hours before the earnings report is released.
What are analysts expecting this evening? As of now, they’re penciling in $179 million in revenue for the quarter and $580 million for the year, which means that at a $70 billion market cap (at $250 per share) the stock is valued at 120X trailing revenues. Patently ludicrous for a huge company, according to everything we know about big companies and slowing growth.
But still, the growth is expected to be remarkable — and the temptation is always there to say “maybe this time will be different”. Snowflake in 2021 (FY22 for them) will end up having revenue that’s more than double what they had the year before, and the forecast for 2022 is 90% growth (this current year, just begun, is their FY 2022), followed by 70% in the following year. That’s wild growth, nobody else is in that category when it comes to megacap companies — that’s like Zoom Video growth, but not caused by a pandemic. They aren’t forecasted to be profitable anytime soon, but if the trend continues they might hit profitability in three or four years.
I can see some temptation as the shares come back down to where they started trading in the Fall, and these kinds of persistent high-growth companies are what every investor wants to own — top-line growth of 50-100% doesn’t take that long to turn into massive cash flow, assuming they can keep the growth up. But given the “high growth, high valuation” exposure I already have in my portfolio I’ll just watch and wait for a while… such stocks tend to trade en masse to a large degree, and there’s only so much risk I can stomach — every portfolio needs some growth and some optimism, but it also needs some discipline and diversification. Maybe the bloom will come off the rose and this great company will drift further down to a more appealing price… if not, and SNOW shocks with a huge forecast this evening, I guess I’ll be watching from the sidelines, forced to settle for the little piece of that growth I am due as a Berkshire shareholder.
What do you think, as we count down to SNOW earnings? Is this a “buy at any price” company that is a gift after a 40% drop from the highs? Is it priced for too much optimism still, up 100% since the IPO? See competitors in the data space that you prefer? Let us know with a comment below.
P.S. This is a pitch for The Insider Alert, so is there actual insider buying going on? I have not dug through all of the filings, it’s quite inscrutable because of the massive dump of insider data so far as the venture backers and insiders got stock awards and converted some of their B shares to A shares, with some selling, but I haven’t noticed any “regular” insider buying yet, where insiders actually use their own money and buy at the market price. Doesn’t mean there isn’t any, but I didn’t see it. You would expect that companies that went public within the past year will have a meaningful amount of insider selling as their locked up shares are generally made available, since a lot of them have been waiting 5+ years for this payday, but there has also not been a mad rush for the exits. I wouldn’t read much into the insider activity at this point, it’s frankly kind of a mess of confusing data (a bit ironic for a data company, but not unusual for a recent IPO)… the most compelling “insider” info for this one is probably the ownership by some smart folks, including Berkshire and Salesforce and the continuing large positions by Snowflake’s venture backers like Altimeter.
Disclosure: of the stocks mentioned above I own shares of Google parent Alphabet, Berkshire Hathaway, and Amazon. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.