Snowflake (SNOW) in Retreat Ahead of First Earnings Report

Snowflake Inc. (SNOW) reports earnings for the first time as a public company after Wednesday's closing bell, with analysts expecting a loss of $0.26 per share on a miniscule $147.65 million in revenue. The cloud data software platform was valued at $12.4 billion by private markets in February, but that number has lifted to an astronomical $84.45 billion since the public offering, higher than two-thirds of Nasdaq-100 index components.

Key Takeaways

  • Snowflake came public on Sept. 16 at $245, more than double the expected IPO price.
  • The company is now valued at $84 billion, even though 2020 revenue won't exceed $600 million.
  • Price action has been range bound since the stock hit a new low on Sept. 24.
  • The initial lock-up period will end on Dec. 14, allowing employees to sell 25% of holdings.

The stock opened for trading on the NYSE at $245 at Sept. 16, more double the $120 pricing, in the largest software initial public offering (IPO) in history. It was halted at $276 a few minutes later due to extreme volatility and hit a high at $318 before ending the session at $254. The company sold 28 million shares for a $3.4 billion windfall in the offering, with the low float responsible for the wild price swings.

Daily volume mounted 2 million to 3 million shares in many November sessions, with a significant portion of the low public float turning over each day. However, the initial lock-up period for employees will end on Dec. 14, allowing them to sell 25% of holdings. A second lock-up "release" will occur in March, when employees can sell the balance of holdings, if they choose. These events have the potential to greatly affect price action and buying interest.

Wall Street consensus on Snowflake stock highlights extreme risk, barely posting a "Moderate Buy" rating based upon 9 "Buy" and 11 "Hold" recommendations. More importantly, two analysts are telling shareholders to close positions, even though Snowflake has traded publicly for less than three months. Price targets currently range from a low of $175 to a Street-high $350, while the stock is set to open Wednesday's session about $58 below the high target.

Lock-up period is a caveat outlining a period of time after a company has gone public when major shareholders are prohibited from selling their shares. During the IPO lock-up, company insiders and early investors cannot sell their shares, helping to ensure an orderly IPO and not flood the market with additional shares for sale.

Snowflake 60-Minute Chart (2020)

Chart showing the performance of Snowflake Inc. (SNOW)

The newly minted issue settled in the $250s on the first trading day and entered a decline that found support near $215 on Sept. 17. A buying wave stalled below the prior high at the month's end, giving way to a downdraft that undercut the prior low by six points before hitting an all-time low at $209. Price action settled into a sideways pattern near the range midpoint through the middle of October and turned higher, topping out within 18 points of the first day's high on Oct. 22.

Sellers took control into the middle of November, but October range support held intact, ahead of an uptick that completed a 100% retracement into the October peak before Thanksgiving. It rallied to an all-time high at $341 on Nov. 30 and turned tail once again, failing the breakout. This price action reinforces resistance just above $300, but a buy-the-news reaction after earnings could easily mount that barrier, given high volatility.

Of course, it's too early to read longer-term buy or sell cycles, especially in a fast-moving December market. As a result, it isn't wise to depend on 60-minute support and resistance levels, except for intraday trading. Even so, this week's earnings reaction should expose actionable information about true buying interest, which will take control after employees are allowed to sell shares.

Actionable refers to a business directive or investment strategy that can feasibly be accomplished shortly. Company managers and investors try to identify things that are immediately actionable because they may be prerequisites for accomplishing future goals and higher-level directives.

The Bottom Line

Snowflake reports earnings for the first time on Wednesday, with the stock now valued light years above projected annual revenue.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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