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Snowflake’s growth momentum draws cheers, but valuation concerns remain

More than a dozen analysts initiated coverage of Snowflake’s stock Monday, weeks after the company came public.


NYSE

Red-hot software stock Snowflake Inc. found some new fans Monday, while others balked at its sky-high valuation.

The majority of analysts who initiated coverage of Snowflake
SNOW,
+2.50%

on Monday chimed in with bullish ratings, just a few weeks after the company executed the largest U.S. software initial public offering to date. At least eight analysts began coverage of the shares with the equivalent of a buy rating, though at least six others started coverage at the equivalent of hold.

Shares ended up 2.5% in Monday’s session.

Read: Snowflake IPO surge makes it the priciest tech stock by a mile

“It’s well known that no two snowflakes in the world are exactly the same,” Mizuho analyst Gregg Moskowitz said, while initiating coverage of the stock with a buy rating and $300 target price. “But this Snowflake is truly exceptional, and on its way to becoming one of the most strategic software vendors, in our view.”

Moskowitz expects that Snowflake will benefit from a “consolidation” trend among companies looking to standardize their data activities on a single platform. “Given the limitations of legacy solutions, coupled with the significant benefits associated with Snowflake’s platform, we expect that a large and growing number of organizations will opt to deploy a next-generation data cloud platform like Snowflake for net new workloads and/or some of their existing workloads,” he said.

Truist Securities analyst Joel P. Fishbein Jr. took a similarly upbeat view as he set a buy rating and $350 price target. “We believe that the company possesses a unique technology advantage that will give them a dominant competitive position in the data cloud in both the short and long term,” he wrote.

He praised the company’s growth trajectory as well: “Compared to some of its industry peers, Snowflake is the fastest-growing software company in history at scale, and we believe it will be the fastest ever to $5 billion in revenue.”

Bernstein’s Zane Chrane also pointed to the company’s “sustainably strong growth,” but balked at the stock’s valuation.

“Given the already high expectations from the buyside (reflected by ~64x EV/FY22 sales), we believe there is risk of multiple contraction over the next six months, as investors begin to anticipate the lockup expiration on insider sales, and this event potentially puts downward pressure on the share price,” he wrote as he initiated coverage with a market perform rating and $270 price target. “The rapid deceleration in customer adds in recent quarters also gives us some concern.”

Valuation was a concern for Jefferies analyst Brent Thill, too. In a note titled “SNOW Falls Before It Accumulates,” he set a hold rating and $250 target price.

“Fundamentals are alive with the long-term vision of an enterprise data cloud + an all-star team at the helm,” he wrote. “But at 51x our CY22 revenue estimates (versus peers at 17x) and 21x our CY23 bull case estimate, the stock seems ahead of its fundamentals.”

He argued that investors with a time horizon of two to three years may see better entry points into Snowflake shares.

Snowflake went public in a strong year for initial public offerings, as the Renaissance IPO ETF
IPO,
+1.07%

has gained 82% so far in 2020 while the S&P 500
SPX,
+1.64%

has risen 9.6%.


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