Should UK investors buy Snowflake shares?

Snowflake (NYSE: SNOW) shares were listed on the New York Stock Exchange this week. On its first day of trading, the share price popped higher to more than double. The cloud data warehousing firm had the largest software initial public offering (IPO) on record, valuing it at around $70bn – […]

Snowflake (NYSE: SNOW) shares were listed on the New York Stock Exchange this week. On its first day of trading, the share price popped higher to more than double. The cloud data warehousing firm had the largest software initial public offering (IPO) on record, valuing it at around $70bn – more than five times the private market valuation it reached in February.

Snowflake shares were priced at $120, after being revised higher twice this month. On the first day of trading, the share price climbed to over $300, and finished the day up 112% at $255.

Early investors of Snowflake shares include Salesforce and Berkshire Hathaway. The investment by the conglomerate run by Warren Buffett is interesting. Buffett rarely gets interested in technology startups that are not yet profitable, and tends to opt for more mature companies.

Snowflake’s IPO comes at a similar time to several technology IPOs. It follows the IPO of JFrog, an Israeli-based software company that closed its first day 50% higher above its IPO price. Investors expect several other technology IPOs this year including Airbnb, Palantir, and Doordash.

Why was there so much demand for Snowflake shares?

Snowflake is an exciting cloud computing company that should benefit as businesses increasingly rely on big data and artificial intelligence. Snowflake’s platform should make it easier and cheaper for companies to access and analyse the vast amounts of data held across a business. 

Furthermore, Snowflake could benefit from powerful network effects. As more customers adopt the platform, more data can be exchanged with other Snowflake customers. This enhances the value of the platform for all users.

Investors in Snowflake shares like that its cloud data platform is delivered as a service. It requires little maintenance if any, and allows customers to focus on obtaining value from their data. It fits right into the trend of software-as-a-service (SaaS) that has recently seen strong demand from investors.

Strong growth numbers are attracting investors like me. It grew its number of customers from 1,547 in July 2019 to 3,117 in July 2020. The price of Snowflake shares reflects significant revenue growth in recent years. Snowflake has grown its revenue from $96.7m in January 2019 to $264m in January 2020, representing year-on-year growth of 174%.

Should UK investors buy Snowflake shares now?

Snowflake looks like a fantastic company with significant growth potential over the coming years. However, after the share price doubled on its first day of trading, Snowflake shares now look expensive to me.

Its valuation looks expensive relative to several other software firms. After the strong performance since its IPO this week, I calculate that Snowflake had a price-to-sales ratio of almost 175 times. In comparison, Zoom Video Communications at the same time had a price-to-sales ratio of roughly half that at 87 times.

If you thought many US software companies were running at lofty valuations, Snowflake’s current valuation can make them seem cheap in comparison.

So, should UK investors buy Snowflake shares now? I guess that’s up to your risk appetite. Given what I think is a very expensive valuation, I would wait for a lower price over the coming months before making a purchase.

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Harshil Patel owns shares in Zoom Video Communications. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and Zoom Video Communications and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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