Is Snowflake (SNOW) A Great Buy?

·3 min read

Luca Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net gain of 27.7% was delivered by the fund for the third quarter of 2021, and this compares to the overall increase, including dividends, for the Nasdaq 100 and S&P 500 of 13.2% and 8.9%, respectively. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Luca Capital, in its Q3 2021 investor letter, mentioned Snowflake Inc. (NYSE: SNOW) and discussed its stance on the firm. Snowflake Inc. is a Bozeman, Montana-based cloud computing-based data warehousing company with a $109.7 billion market capitalization. SNOW delivered a 29.63% return since the beginning of the year, while its 12-month returns are up by 11.95%. The stock closed at $364.78 per share on November 29, 2021.

Here is what Luca Capital has to say about Snowflake Inc. in its Q3 2021 investor letter:

"You may notice that the majority of our filters are qualitative. While we do believe that any company can be overvalued, the market has historically valued companies with durable competitive advantages below their intrinsic value because it expects the ROIC to trend towards average over time. However, the best businesses can often earn returns far and above their cost of capital for much longer than can be reasonably expected. Therefore, these businesses tend to trade at multiples that would be considered expensive by traditional metrics. However, the market can realize this opportunity and apply a much higher valuation on these companies, hence discounting their future returns to a more average return.

One example of this is Snowflake (SNOW), which recently debuted at an EV/S of over 175x. Although future returns might still be attractive, a significant amount of upside has already been captured. If we assume P/S drops 83% over the next 10 years to 30x with modest share dilution of 3.5%, in order to achieve a 15% annual return, Snowflake would have to grow sales at a ~41% CAGR to a $13B run rate. Snowflake is an exceptional company in a massive market so it might prove to be undervalued even at today’s prices, but its future returns have been greatly muted. Coca Cola is another example of a company with a wide durable moat but was so overvalued in the late 90's it provided poor returns over the subsequent decade."

Based on our calculations, Snowflake Inc. (NYSE: SNOW) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. SNOW was in 73 hedge fund portfolios at the end of the third quarter of 2021, compared to 70 funds in the previous quarter. Snowflake Inc. (NYSE: SNOW) delivered a 22.47% return in the past 3 months.

Disclosure: None. This article is originally published at Insider Monkey.