As I described in Part 1 of this article, Snowflake is a fantastic company. I’d been planning on sucking it up and overpaying for some SNOW stock once it started trading.
Here’s the thing though. Even assuming Snowflake is the Amazon of SaaS – which I think is reasonably possible though far from guaranteed – there’s still going to be a big hangover when the current SaaS bubble pops.
For a refresher, here’s what Amazon did during the dot com craze:
Remember, this is the single best dot com stock out there. It went up more than 10-fold in the 1990s but then dropped a harrowing 93% in the ensuing crash. If you bought the IPO and held on, it was deeply unsatisfying, though you never showed a large loss.
And if you bought the IPO and took some gains in 1999 or 2000, things turned out well. If you bought anywhere near the top, however, it was a crushing experience, and most folks sold out for massive losses in the ensuing years. Amazon would not go on to make new highs until 2009, 10 years later.
And Amazon was the best of the best, remember!
If you weren’t fortunate enough to buy Amazon, how’d you fare? Let’s consider Jim Cramer’s 10 Stocks for the Next Decade, published in February 2000:
- 724 Solutions – acquired for $3/share
- Ariba – bought out at a 90% loss
- Digital Island – acquired for $3/share
- Exodus – went bankrupt
- Infospace – went down 99.8%
- Inktomi – sold to Yahoo for 99% loss
- Mercury Interactive – stock was delisted
- Sonera – sold for 80% loss
- Verisign – still alive and kicking today. Trading a little south of its year 2000 peak price 20 years later.
- Veritas – acquired for 75% loss
Tech investors today may think they’d never buy any of those stocks. We’re smarter now, right?
But consider what Cramer wrote about his choices in February 2000:
We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over — and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don’t even have earnings per share, so we won’t have to be constrained by that methodology for quarters to come.
Buy the dips, Wall Street hadn’t discovered the stories yet, and they were early along enough that fundamental valuations didn’t matter yet. Sound familiar? And remember, this wasn’t in 1996 or 1997 — Cramer wrote this one month before the bubble popped.
None of this is to complain about Cramer in particular. Most people were afflicted with the same mentality in that euphoric moment.
You don’t see me chasing a bunch of marginal SaaS companies now because I know how the story ends. 75% of the listed stuff now is going to crash and burn and even the good ones will have a sharp drawdown when valuation ratios go back under 10x P/S, as they always do.
Still, the growth-at-a-reasonable-price investor in me says why not buy some of the couple of best SaaS stocks and hold on?
Price is why though. I could make a case for SNOW stock at $50, $70, even $100. Here though — find me a single case of a large-cap company selling at 200x revenues that was a good investment from that price.
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Is a buyer of Snowflake now willing to hold until 2030 to show a gain on their investment? That may sound silly, but I ask it in all seriousness. Starting from a $70bn valuation (even assuming no further dilution) there’s only modest upside here even assuming markets get crazier.
Meanwhile, the 10 years to a higher long-term valuation is the base case if Snowflake is the next Amazon and we are near its peak valuation for the time being now. Even assuming ridiculously good levels of growth for the next few years, Snowflake would still only be doing $5-$10 billion a year in revenues and marginally profitable in, say, 2027. How likely is it that the business is worth more than $70 billion today? Remember there are concepts here such as discount rates and time value of money as well – 2027 sales are worth much less than today’s sales, even if the market currently doesn’t see it that way.
Let’s turn back to the Cramer 2000 article again for a second. He added this bit, which really speaks to the dilemma investors face now:
And if I had my druthers, I wouldn’t own any other stocks in the year 2000 [besides his 10 above picks]. Because these are the only ones worth owning right now in this extremely difficult, extremely narrow stock market. They are the only ones that are going higher consistently in good days and bad.
I love every one of them, just as I loathe the rest of the stock universe.
Investors have to choose whether they want to chase returns for however long the current bubble lasts, or whether they want to own good companies for the duration and let short-term relative returns fall where they may.
I’d love to own some quality SaaS companies like Snowflake. But my bids are competing against bids from people thinking like Cramer who literally don’t want to own anything except SaaS. They loathe the rest of the stock market.
There’s no way I’m going to get to buy anything at a fair price when my competition is willing to pay any price for the same few tech stocks.
Once the Snowflake IPO got the Berkshire bump, I started figuring that I’d be unable to buy the stock outright at a halfway-acceptable price. Still, I planned to sell puts and buy calls, giving some upside right tail exposure.
But even that isn’t workable now. If SNOW stock stays around $250, it’d be selling for 200x sales.
Even if you write puts at $125 — way way out of the money — you’d be on the hook to take stock if SNOW stock dropped there. Is it unimaginable that Snowflake falls back to 100x trailing sales in a correction?
Snowflake is one of the best SaaS companies in the world. But now it’s trading for $70 billion despite not even doing a billion in revenues yet and running massive losses. You have to assume triple-digit revenue growth for the next four years (!) to get a reasonable valuation from this price. And not even cheap — just reasonable involves revenue growth of a nearly impossible scale through 2025.
Snowflake will probably eventually grow into a $70 billion market cap. I wouldn’t bet against Frank Slootman. But I’m highly doubtful this is the best price Snowflake will ever be offered at. Look at the great growth stocks of history – your Apples, Microsofts, Netflix, Amazons, etc. All pulled back more than 50% multiple occasions, and 80-90% drops are hardly out of the question.
I’d been hoping the recent tech sell-off we were getting would give us a decent shot at Snowflake. It wasn’t to be.
Keep this one on the watchlist – it’s going to be one of the SaaS survivors when a lot of the fakers and pretenders disappear in coming years. But investors buying at today’s price are unlikely to have good returns over the next three-to-five years. That’s not a call on where it trades tomorrow or next week, however there’s a great chance you’ll see a sub-$50 billion (and quite possibly much lower) valuation in the not too distant future.