Data-warehouse-as-a-service company Snowflake (SNOW 0.39%) hit the ground running when it went public on Sept. 16. As of this writing, shares are trading at more than twice their initial public offering price of $120, giving the company a $70 billion market capitalization and bragging rights to the biggest IPO of the year. Given that valuation, however, investors should be wary.

Huge price-sales disconnect

Snowflake provides cloud-based data storage and analytics services. Its platform allows client companies to access the same copy of data from virtually anywhere, with a scalable structure that enables companies to adjust their use of its services as needed. 

The idea behind the platform is to outsource a company's data management to the cloud. Snowflake and other cloud-based data services, like Amazon's Amazon Web Services, support the data storage and computing needs of their clients, thereby reducing the need for those users to buy, implement, and maintain their own computing hardware.

Artist's rendering of data center network

Image source: Getty Images.

Snowflake is a popular choice for companies, as its program integrations and seamless scaling offer significant customer value. Similarly, Amazon's fully managed, cloud-ready data warehouse solutions integrate near-perfectly with other Amazon data services and render outsourced data management as painless as possible. Both are accessible through the cloud, but since Snowflake was designed for the cloud only, it edges out the competition.

For example, using Snowflake, an employee in Kansas and one in Japan can access the same weekly sales data at the exact same time, and they are both able to run separate queries on the dataset. Snowflake makes it straightforward and easy, whereas Amazon, in this case, would have users competing over the same data cluster, so only one person could upload or retrieve information at a time without causing a lag.

For customers with heavy monthly usage, though, Snowflake's price can escalate rather quickly, since computing power is calculated on a per-second rate after the first minute. Snowflake works optimally for users in the cloud and does not support on-premise solutions that do not integrate well with cloud-based warehousing, while its competitors may be better suited for companies with mixed or transitional needs.

Snowflake is still a young company, and its revenue growth -- while strong at 121% year over year in the second quarter -- is not even close to justifying its current valuation. In the half-year ending July 31, it brought in $242 million in revenue versus $104 million during the prior-year period, and total customers also doubled year over year.

But net losses nearly doubled from fiscal 2019 to fiscal 2020 as its general and administrative expenses grew by 200% and sales and marketing costs jumped by 134%.

Snowflake is growing at a tremendous rate, and its spending is helping to fuel that growth. Yet in comparison to other hot-topic tech companies with high revenue growth rates, Snowflake's price-to-sales ratio is excessively high. 

SNOW PS Ratio Chart

SNOW PS Ratio data by YCharts

Limited shares lead to ridiculous share prices

Snowflake issued just 32.2 million shares in its IPO, and the shares have been highly sought after by investors for good reason. The company enjoys triple-digit growth, offers solid value to organizations looking to upgrade or acquire data warehousing capabilities, and the broad trend of migration to the cloud looks favorable for the company's future. But because the company's public float -- the number of its shares held by public investors and available for trading -- is only around a tenth of its total shares, market dynamics have led to a patently ridiculous stock price as what investors are willing to pay for that small percentage of shares is driving the market cap.

Rather than rushing to buy into this stock, savvy investors would do better to wait for the company's first 90 days on the stock market to pass. Around 90% of Snowflake stock is owned by employees and non-employee insiders, so if a lot of them decide to sell when the 90-day lock-up period ends, that could lower Snowflake's stock price as the huge flood of supply calms the stock's volatility. According to the company's SEC filings, up to nearly 49 million shares held by insiders could be released to the available float after that lock-up period expires.

The combination of greater share availability with perhaps a general market pullback could easily bring Snowflake's stock price down to a more reasonable level. At the moment, though, enthusiasm mixed with relatively little supply has inflated the company's valuation, and investors would be better served by putting their money elsewhere. But should the stock price dip significantly in the coming months, they might want to take the opportunity to buy.