Will earnings leave Snowflake’s share price in the cold?

On 13 November, Snowflake’s [SNOW] share price fell to earth, dipping to $234.80 — 7.5% below its first closing price of $253.93 on 16 September. However, recent weeks have seen a recovery, and the cloud data warehousing company’s stock closed at $328.79 on 27 November. With its first quarterly results since going public due to be announced on 2 December, investors are hopeful that Snowflake’s share price can ward off its earlier frosty performance and deliver some seasonal cheer.

The IPO caught the attention of the markets this autumn, with Snowflake’s share price more than doubling during its first day of trading on 16 September, up from $120 per share. Snowflake’s share price then went into a short-term meltdown, tumbling 34.6% in eight days from an opening intraday high of $319.00 to an intraday low of $208.55 on 24 September.

Snowflake’s share price staged a recovery, gaining 33.4% to an intraday peak of $278.26 on 30 September and, after a flurry of peaks and troughs, achieved a high of $297.09 on 22 October.

Keeping cool

Snowflake, like many tech companies, saw increased business from the stay-at-home conditions imposed across global economies in response to the coronavirus pandemic. As businesses pivoted towards remote working practices, Snowflake’s cloud computing services experienced a boom in demand.

Snowflake’s IPO was one of 2020’s most-hyped market events, with Silicon Angle describing the offering as “the hottest IPO in software history”. The data warehouse giant’s valuation surged from $33bn in just a few hours, finishing its first day of trading with a market valuation of around $70bn, and becoming the largest company ever to double its value on its first day of trading.

However, Snowflake’s share price fell 10% the next day amidst a wider pullback in the markets, fuelling concerns that the stock was overvalued — to which Frank Slootman, CEO of Snowflake, responded, “A stock is worth exactly what somebody wants to pay for it… It’s like talking about the weather. It is what it is.”

“A stock is worth exactly what somebody wants to pay for it… It’s like talking about the weather. It is what it is” - Frank Slootman, CEO of Snowflake

Two main factors, according to Seeking Alpha, underpin the valuation concerns keeping investors cool about Snowflake’s share price.

The first of these is the risk of share overhang both from institutional investors, who can double their money as long as the stock is over $240, and from the exercise of options and restricted stock. Between them, these sources of potential share overhang imply a required 30% growth rate in earnings per share (EPS) to avoid common shareholders losing out.

The second factor is technological interdependence. Snowflake’s software overlaps with and is reliant on services provided by various other established software companies, in particular Amazon [AMZN] and Microsoft [MSFT]. Since these suppliers also produce their own rival products, there is a significant cannibalisation risk for Snowflake’s market by the very suppliers they depend on.

Snowflake windfall?

Zacks has a consensus sales estimate of $146.9m for the current quarter, with a high estimate of $154.6m and a low of $144.62m. Even this low estimate would represent a 186.7% increase on the $50.45m reported in Q2 2021, Snowflake’s last earnings announcement before its IPO, and a 351.8% increase year-over-year.

Given that EPS growth will be front and centre in the minds of investors concerned by the possibility that the stock is overvalued, a consensus EPS estimate of -$0.27 — up 80.3% from -$1.37 in the previous quarter and 84.8% year-over-year — will be encouraging if actualised.

Data warehouse analysis

Given widespread uncertainty over how fairly Snowflake’s share price reflects the company’s true value, market analysts collectively seem undecided on the stock. A median 12-month consensus target price of $269 among 22 analysts polled by CNN Money represents an 18.2% drop from Snowflake’s share price at close on 27 November. While the most pessimistic forecast puts the target price at $175, 46.8% below the latest price, the high forecast would see the stock growing 56.6% to $515.

The 23 analysts polled by CNN Money are similarly split in terms of recommended ratings for the stock.

The consensus was to hold, with 11 analysts giving this rating. Meanwhile, 10 analysts rated Snowflake a Buy, but one apiece rated the stock Underperform and Sell. Market sentiment, then, appears to be nudging towards optimism, but with significant detractors.