Shares in data-software firm Snowflake (SNOW) have climbed by 30 per cent in the three months since its initial public offering (IPO). Is there potential for investors to make further gains from the stock, or has the rally run its course? Is Snowflake stock a good investment heading into 2021?
This SNOW stock analysis looks at the performance of the share price since the IPO and the outlook for the stock for next year.
The software industry today: tech stocks rally carries share prices higher
The Snowflake share price has benefitted from increased investor interest in cloud computing and software stocks in 2020 that is set to continue into 2021. The company provides large-scale data warehousing and analytics capabilities and aims to deliver “a single and seamless experience across multiple public clouds”.
The Covid-19 pandemic has accelerated the adoption of cloud-based technologies, with companies around the world switching to remote working. The Global X Cloud Computing ETF, listed on the Nasdaq stock exchange, has rallied by more than 79 per cent since the beginning of the year and 127 per cent since March when the stock market sold off. The Information Technology sector has outperformed the other 10 S&P 500 sectors by at least nine per cent on a year-to-date basis, noted Larry Adam, chief investment officer at the investment firm Raymond James.
Snowflake pitches long-term growth
Snowflake launched its IPO on September 16, capitalising on the rising pro-technology stocks’ trend. The stock doubled from its $120 per share listing price to close at $254 per share. The sale of 28 million shares valued the company at $70bn, making it the largest ever software IPO.
The share price climbed to reach $390 by December 8 after its first quarterly earnings report as a public company on December 2 exceeded revenue expectations. The stock subsequently slipped back to the $330 per share level.
Snowflake reported total third-quarter revenue of $159.6m, an increase of 119 per cent year-over-year, while its net loss increased to $168.89m, or $1.01 per share from $88.06m or $1.92 per share in the third quarter of 2019. Analysts had expected revenue of $147.52m and a net loss of $0.26 per share.
The company reported 3,554 total customers with 65 customers accounting for trailing 12-month product revenue of more than $1m.
Snowflake issued fourth-quarter revenue guidance of $162-167m, up by 97-103 per cent year-on-year, and full-year guidance of $538-543m, up by 113-115 per cent from 2019.
Frank Slootman, Snowflake’s chairman and CEO, said in the quarterly earnings call: “Our growth is driven by long-term secular trends in data science and analytics enabled by cloud-scale computing. With the onslaught of digital transformation, data operations have become the beating heart of the modern enterprise. The pandemic has been more or less neutral to our business. Some businesses were negatively affected in terms of demand sentiment, but others stepped up their data strategy given the new complexities of the health crisis and economic effects.”
Slootman added: “It bears repeating that Snowflake is not a SaaS business model. We're a consumption company and our reported revenue has a direct relationship with the consumption of our platform during the period. The consumption model is variable not fixed, meaning our model places no limits on how much of our platform, our customer can consume and this contributed to our strong revenue retention rate.
Does that potential for growth indicate a bullish Snowflake share price forecast? What is the outlook for the stock based on analyst ratings?
Snowflake stock price prediction: is the stock still a buy in 2021?
Of the 23 analysts that have issued a 12-month Snowflake share price prediction, the majority have a price target below the current level of the share price. The average price target is $284.55 per share, with a low estimate of $175 per share and a high of $350 per share. The average price is 14 per cent below where the share price closed on December 23.
Among the recommendations, 13 analysts have issued “hold” ratings, with eight saying “buy” and two recommending selling the stock.
Analysts at Mizuho boosted their Snowflake stock forecast on December 16 to $350 per share from $310 per share with a buy rating. However, analysts at Deutsche Bank downgraded the stock to hold from buy on December 11, with a price target of $335 per share, after the run-up in the share price and ahead of the expiry of the post-IPO lock on investors selling shares.
The analysts commented: “We are downgrading Snowflake to hold given there has been very little change in the fundamental story since 3Q results, yet the shares have risen 28 per cent. With Snowflake trading at 52x FY23E (Jan ’23) sales, the risk/reward, in our opinion, is now balanced. The expiry of the lockup could weigh on share price accretion from here, as early holders sell and SNOW’s free float rises from 32.2m to 345.8m shares in March ’21.”
But the analysts continued: “Yet, pent-up demand for high-multiple names, such as Snowflake, may be limited as we wrap up 2020 and investors look to protect their year. Any profit-taking around the lock-up expiry could be exaggerated by tight liquidity typical in late December and early January.”
Investment firm William Blair is more positive on the outlook for the stock, with analyst Bhavan Suri estimating that the company will generate revenue of $579m in 2021 – representing growth from the company’s forecast of $538-543m for 2020 – and $1.08bn in 2022.
Suri explained: “While still in early stages, Snowflake’s unique multi-cloud architecture positions the company as a hub for quick and easy data sharing. Customers can store, analyse and share data across all three major public cloud providers directly through Snowflake’s single user interface. Over time Snowflake has the potential to become an industry-leading source for data consumption and analysis, solidifying the company’s position as a must-have data storage and processing solution.”
Stock forecasting service Wallet Investor is also bullish on the longer-term outlook in its Snowflake stock price prediction, putting the share price at $347.50 in January and climbing to $779.49 per share by the end of 2021.
Looking ahead, the service predicts the share price will rise to $1,249.95 by December 2022, $1,723 per share by the end of 2023, and $2,663.59 per share by December 2025.
Read more: Stock market predictions for 2021
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