Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

One Big Danger for Snowflake Investors

By Taylor Carmichael - Dec 14, 2020 at 2:37PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stock is richly valued, and insiders will soon be able to sell.

While Snowflake ( SNOW -8.57% ) is an exciting company with a great future, the stock might have the wrong kind of excitement over the next several months. This stock scares me for two reasons.

One, the valuation is insane. Snowflake is priced at 200 times revenues. That's way higher than Zoom ( ZM -6.48% ) or Datadog ( DDOG -7.72% ). Snowflake has a $100 billion market cap, and it hasn't even made $1 billion in revenues yet. This valuation means there's a lot of room to fall just on the basis of multiple contraction.

Man looking at smart phone about to walk off a cliff.

Image source: Getty Images.

What might start a mini-crash is the second issue. Over the next few months, investors are facing a series of escalating lock-up expirations. Insiders will soon be allowed to sell their shares. 

The lock-up expiration on Dec. 15 is tiny. This one allows employees and former employees to start selling 25% of vested stock options. As of July 31, this represents just 1,295,695 shares. There are 50 million shares outstanding, so it's not a big deal. And yet on Monday, the stock is dropping 7% in anticipation of this event.

By the end of December, this class might expand to non-employee insiders. That's a much bigger deal. Potentially, over 37 million shares might be allowed to trade. And then, two days after the second quarterly report in March, all the insider shares are unlocked. This is a mind-numbing 345 million shares that might hit the market.

I'd avoid these shares until spring.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Snowflake Inc. Stock Quote
Snowflake Inc.
SNOW
$311.00 (-8.57%) $-29.15
Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$197.71 (-6.48%) $-13.70
Datadog, Inc. Stock Quote
Datadog, Inc.
DDOG
$164.53 (-7.72%) $-13.76

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
656%
 
S&P 500 Returns
144%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.