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A Frosty IPO Rally Thaws: Meltdown Or Buy Point?

The IBD 50 Stocks to Watch feature highlights leading growth stocks. Snowflake (SNOW), with its accelerating sales growth and high-caliber backing from Warren Buffett’s Berkshire Hathaway (BRKA), is Tuesday’s target stock.




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The San Mateo, Calif., outfit is a developer of cloud-based database software. It competes with heavyweight cloud-data crunching and management programs like BigQuery from Alphabet‘s (GOOGL) Google and Amazon.com‘s (AMZN) Redshift. Snowflake allows users more freedom to operate on multiple cloud platforms, a growing trend.

Although a relatively new company (established in 2012), Snowflake’s rise has been swift. Its September 2020 IPO took the crown of the largest software public offering in history, raising $3.4 billion. Buffett’s Berkshire had a piece of that success, reporting an initial $735 million investment in 6.1 million class A shares, about 2.2% of the overall company, as of September 2020. Salesforce (CRM) is also a major shareholder.

Fresh Snow: IPO Growth Stock An Instant Big Cap

After its IPO, Snowflake quickly snowballed into a big-cap stock, currently weighing in with a market cap of just over $100 billion. Quarterly sales growth has paced at a steady triple-digit clip. Losses have lingered, but analysts expect to see a sharp improvement when the company reports third-quarter results.   

Snowflake’s recent success has been based on its rapid sales growth and ambitious future projections. Management aims to hit $10 billion in annual revenue by 2028, targeting an astonishing 44% annual growth rate. 


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Snowflake’s most recent second-quarter earnings highlighted this growth. Revenue was $272 million, up 105% vs. last year’s $133 million. Snowflake improved its net revenue retention rate to 169%, while free cash flow has now been positive for three straight quarters. 

In terms of future projections, the focus will be firmly on the profit line when the company reports Q3 results after the market closes on Dec. 1. FactSet shows analysts seeing a loss of six cents a share, up from a 28-cent loss in the year-ago period. Revenue projections call for a $305.6 million tally, a 91% leap.

IPO Volatility May Result In a Wild Ride

Snowflake stock fell 34% from Dec. 31 through mid-May, before turning and launching into a six-month rally. That rally swept it past a $328.16 buy point in a cup-with-handle base. The 14-month-old stock has pulled back sharply in the five sessions since touching its Nov. 17 peak.

Software stocks in general took a beating over the past five sessions, with software groups posting five of the 10 worst losses among the 197 industry groups tracked by IBD.

The pullback stopped well short of the 328.16 entry, finding support at the growth stock’s 50-day/10-week moving average. Technically, the erasure of gains from the breakout sends a sell signal. And a move below the 10-week average, particularly one in strong volume, could signal a deeper and longer consolidation.

However, a rebound from the 10-week line could provide a follow-on buying opportunity and signal a revival of the young growth stock’s uptrend.

You can find Alan R. Elliott on Twitter @IBD_Aelliott

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