What happened
Shares of cloud data warehouse Snowflake (SNOW -0.26%) plunged on Thursday, down 6.5% as of 12:36 p.m. ET.
Snowflake was maintained at a buy rating by an analyst on Thursday, but that analyst also lowered his price target. Still, given the broad sell-off in growth stocks today, the stock's fall more likely had to do with rising long-term interest rates on Thursday. Additionally, Thursday marked a big stock market options expiration day, which are often volatile days that see traders trying to push stocks around. That's likely happening with Snowflake today, which is hovering right around the $200 mark.
What happened
On Thursday, the 10-year Treasury bond yield rose to a fresh yearly high and the highest level since late 2018, to around 2.79%. It's hard to pinpoint an exact reason; retail sales actually came in slightly lower than expected and jobless claims came in slightly higher than expected today (though still at historically low levels), which are signs of a slight cooling in the economy. However, import prices rose 2.6% in just one month, above the 2.2% estimate, and marking the highest one-month increase since 2011. Inflation fears are continuing to seep into the market after other official data came out this week.
In any case, inflation fears are hitting Snowflake hard. Being a hyper-growth stock, and therefore a long-duration asset with the bulk of its intrinsic value far out into the future, Snowflake and other high-growth software stocks fell hard in response. That's because many investors use the 10-year Treasury as a baseline rate, plus a premium, to discount a stock's future earnings. So the higher interest rates go, the lower the present-day value of earnings well out into the future.
Snowflake is an extremely exciting tech company with a killer product for businesses in the new data-centric economy. However, with that excitement comes a high valuation. Snowflake is currently unprofitable, and trades around 51 times sales.
It may therefore be no surprise that even Snowflake bulls are taking down their price targets, in light of higher rates. Analysts at Goldman Sachs kept their buy rating on shares, but lowered their target price from $335 to $289. That target is still 45% higher than today's price, but the directional movement appears to be putting traders in a sour mood.
Additionally, today marks the monthly options expiration. Options give buyers the right, but not the obligation, to buy or sell 100 shares of a security at a certain price on a certain date. Writers (sellers) of options collect a premium, but are obliged to buy or sell at a certain price on a certain date. On days when options expire, there is sometimes heightened volatility around certain price points, and Snowflake is near the $200 dollar mark today. Options may therefore be activated or expire worthless, depending on what side of $200 the stock lands on at day's end.
Image source: Getty Images.
Now what
Snowflake is a terrific company with an outstanding product, leadership, and growth outlook, however, it also comes at a very high price. Thus, younger investors may want to look at Snowflake shares after its 50% pullback from its highs last year with an eye toward the long term. However, a rising-rate environment could be tricky for this high-multiple stock, even after this correction, so older investors near retirement may wish to steer clear of this name and hold out for an even better price, or invest in more defensive stocks.
