Two of the hottest IPO stocks investors are talking about in September are coronavirus vaccine developer CureVac (CVAC -0.45%) and cloud-data giant Snowflake (SNOW 3.38%). In a short amount of time, these two stocks have turned initial investors' capital into a fortune, with CureVac more than tripling from its IPO price of $16 in August and Snowflake stock more than doubling its $120 IPO price on the first day of trading.
However, both companies now share a common problem: extreme overvaluation. Investors could get more bang for their buck at these price levels by buying just about anything else. Let's look at why, at these prices, neither CureVac nor Snowflake is a stock to put into your investment portfolio for the long term.
Snowflake is a special ... um, snowflake
Through its cloud data platform, Snowflake allows customers and data providers to securely and concisely analyze real-time data. The company's products serve a wide range of applications in the tech world, including data storage, machine learning algorithms, business metrics, and analytical engines, and its customer count grew by 101% year over year to 3,117 at the end of July.
Snowflake now serves 146 of the Fortune 500 companies, and it's primed to capitalize on the growth of the cloud. According to market researchers IDC, by 2025, 49% of data will be secured in public cloud environments, up from 30% this year.
Without a doubt, Snowflake has a superb business model and is capable of delivering fantastic growth results. However, the stock is trading for a stunning price-to-sales multiple of 146, based on its $70 billion market capitalization. That would be reasonable if the company were growing its revenue by thousands of percentage points year over year. Unfortunately, this is not the case. During the first half of 2020, Snowflake brought in $242 million in revenue, compared with $104 million in the first half of 2019.
A company with approximately 140% revenue growth would possess a hefty premium if trading at 40 or 50 times sales, let alone 146. Even though the company has a $4.6 billion cash balance and is only operating at a net loss of $171 million every six months, investors should keep in mind Snowflake stock is highly speculative and not for the faint of heart.
CureVac is part of a crowded field
On Aug. 20, Dutch biotech CureVac concluded exploratory talks with the European Union to supply 225 million doses of its experimental coronavirus vaccine to all member states. That is an outstanding achievement for a company that held its IPO the same month. Moreover, CureVac secured up to $299 million in funding from the German government for the vaccine candidate's development.
The problem with CureVac is not its biotechnology, but its progress. There are currently nine coronavirus vaccine candidates in phase 3 clinical trials and five vaccines approved for early or limited use. Meanwhile, CureVac's experimental COVID-19 vaccine is only in the first stages of clinical testing, with immunization and safety data due in the fourth quarter of 2020.
Hence, whether the company can deliver a coronavirus vaccine promptly becomes a significant issue. With so many promising vaccine candidates in clinical testing, the market opportunity for COVID-19 immunization will likely be fiercely competitive. Major biotechs such as Novavax (NVAX -1.05%) and AstraZeneca (AZN 0.82%) already have the capacity to produce billions of doses of coronavirus vaccines by the end of the year.
If CureVac's vaccine does not succeed in clinical testing, or does not enter commercialization by an optimal time, the company has very little in its pipeline to cushion it from the setback. The only other candidate that made it into phase 1 clinical trials is its experimental rabies vaccine.
In the first quarter of 2020, the company only brought in 3.1 million euros in revenue and posted a net loss of 23.9 million euros. Even though the new German government deal puts the company's cash balance closer to 1 billion euros, keep in mind that its market cap has ballooned to almost $10 billion (about 8.4 billion euros). Given its lack of commercialized products, its early-stage pipeline, and its significant cash burn, investors should beware of the exorbitant price they are paying for CureVac's future.