Hive Intelligence Report – Equities: What Is The Big Deal With Snowflake?

Given the popularity of our regular Hive Intel report, which mainly focuses on global macro and markets, we have decided to launch a version focusing solely on equities. This will allow us to leverage our equity network and bring actionable insights and trade ideas which are stocks-focused.

This week, discussion centred around the Snowflake IPO, drivers of Monday’s stock market turbulence, and trade ideas around restructurings, M&A, investor misperceptions and value stocks. We would value your feedback and hope you enjoy our new offering. As a reminder, these are the views from our network rather than the official Macro Hive views.

What Is the Big Deal with Snowflake?

[Snowflake Inc. provides software solutions. The Company develops database architecture, data warehouses, query optimization, and parallelization solutions. Snowflake serves customers worldwide.]

• It’s a tremendous next-gen database, but not so unique that it deserves to be priced as if it owns the whole database market. The point is that high-growth tech stocks are generally overpriced at IPO. It is trading too far into the product’s future.
• People probably sold the last of their WORK to buy Snowflake.
• MSFT bought Citus data last year, which can do almost all of the same stuff. They are working on a new release; I’m quite sure it will hurt Snowflake once that’s out, since their prior version is already very competitive. I’d be looking to short Snowflake after the pop.
• They are a disruptive force in the cloud, taking advantage of new architecture in the cloud and making data workers’ jobs easier. But Amazon, Oracle and Microsoft overlap in this space. MSFT and AWS can blow up momentum with just a pricing tweak to their offering.
• Valuation concern: $70bn – consider that private valuation early this year was a low $12bn, plus the bullish IPO market, and that they have 1/3 the market cap of Oracle, which has 70x revenue in comparison.
• Short term financials: gross margins 62%, projecting over 200% revenue increase in YoY 2020. R&D and expenses are high.
• Snowflake has worked with its visual data integration tool; there are dozens of them out there, so don’t get it. There is Pentaho, Stitch, Alteryx and so on.
• Snowflake IPO: Don’t Overpay, $50 Target Price.

Drivers of Turbulent Monday

• Morgan Stanley Warns Nasdaq 100 May Fall More Than 20% From Peak.
• Fiscal cliff plus peak Fed stimulus equals second leg of correction.
• I’m taking off all my positions and I’m going to wait for the election to pass. I’m fundamentally bullish still, and I’ve been long a combination of stocks, credit and EMFX since March. But now is not the time to position much. We probably need a 20% drop in SPX to price a Joe Biden win, so that’s under 3,000. 20% is a ballpark number, but the return of taxes and regulation must be worth more than 8%.
• What is weighing on today [i.e. Monday] is the ‘virus resurgence’ narrative in Europe. The reality is that ‘reopen’ baskets had so much outperformed the index; that’s a hint of doubt weighed.
• That said, this brings the Fed in play. Cyclicals falling also means long-short has space now to do well, which means Nasdaq is bid.
• Kaplan mentioned concerns of excessive risk-taking and a ‘healthy’ correction. That’s unusual. The Fed does not meet until after the elections. They will not act unless stocks go down 20% or so.
• One factor could be a pickup in US cases, maybe the start of a seasonal increase? It looks like shutdown/stay at home trades are back. Rotating back into WFH software, see ADBE and DOCU.
• GS: ‘Today [i.e. Monday] is the first day of our estimated S&P blackout window, running through 11/6/20. The desk estimates ~70% of the S&P have entered their blackout window.’

Outlook for Equities

• US equity market liquidity deteriorating again, judging by the depth of the e-mini contract order book.

Source: Nasdaq, J.P Morgan

• JP Morgan: ‘This deterioration in equity market liquidity makes quarter-end rebalancing flows more problematic for equity markets over the coming two weeks. We estimate around -$200bn of negative rebalancing flow by entities that tend to rebalance quarterly, such as US defined benefit pension plans, Norges Bank, i.e. the Norwegian oil fund, and the Japanese government pension plan, GPIF.’
• On the positive side, there has been little deterioration in market liquidity outside the equity space.

Source: Brokertec,Eurex, JP Morgan

• Credit Suisse doesn’t see a tech bubble; historically bubbles have re-rated to a P/E of 45 to 72, and Nasdaq is currently at 37.
• US IPO activity is also robust.

Source: Topdown Charts, Nasdaq,SEC, DataStream

• The technology-led selloff has run its course, according to JPMorgan’s Marko Kolanovic.
• There will be massive operating leverage for virtually every company coming out of this crisis, more pricing power due to the death of small businesses, a stimulus post election if they don’t get one in before, and negative real rates. The rally so far was tech-driven. This leg will be broad, and tech will lag.

Election Jitters?

• BoA: ‘For the four tightest presidential races over the past 50 years (2000, 2004, 1976, and 2016), US yield curve steepened on average 11bps while US equities fell 1.4% in the final two months of the election (Sep. + Oct.). In contrast, for the four widest races (1984, 1980, 1988, and 1996), US yield curve flattened while US equities rallied on average.’
• If this election is clean, market will rip/to 4000 on the S&P by year-end.

Source: BofA Global research

Trade Ideas

Equity trade ideas were centred around restructurings, M&A and investor misperception. The most exciting ideas were AAN, GME, and LDOS.

Long

• AAN: Progressive leasing spin-off leads to more partnerships and increased SOTP valuation.
• ARMK: Long-term earnings power unaffected by COVID; potential divesture of uniform division to unlock value.
• GME: ‘Hated stock’ to reestablish relevance in the new console cycle; new management. Team executing also.
• IDO: Key distributor of just-announced ‘instant COVID test’ set for large scale deployment.
• MD: Sell-side dramatically mis-modelling anesthesiology/radiology divestitures.
• RYA.ID: Low-cost provider with ‘fortress’ balance sheet poised to take share from hobbled legacy carriers.
• STKL: Inexpensive off-the-radar pure play of rapidly growing plant-based milk category.

Short

• ITW: expensive ‘fad stock’ with no organic growth and weak end markets.

Bullish GME

• Bullish GME – the stock was strong because in addition to the 2021 bonds getting retired, Nintendo made very supportive comments on physical vs digital. The 2023 bonds are next. There are five sellers for the new consoles: AMZN, TGT, WMT, BBY, and GME. Then the question becomes allocation. It’s not an even split since GME has customer data, and higher attachment of peripherals so OEMs over-index to them. This could be a $50 stock.
• The higher-priced PlayStation 5, at $499, has a disc drive, while the $399 digital version doesn’t. The former is good news for GameStops’ used-game sales business, while the latter provides Sony with a larger cut on game sales – assuming users buy digital games through its online store.
• In the past week, GameStop has earned two analyst upgrades. Telsey Advisory Group’s Joseph Feldman upgraded his rating to ‘outperform’ and raised his price target to $10 from $9. He said the forthcoming consoles could reinvigorate its sales, while he likes the company’s moves to close stores, invest in digital capabilities, and add business lines. Jefferies analyst Stephanie Wissink upgraded the stock to ‘buy’ from ‘hold’ and raised her price target by a dollar to $10, citing similar trends.
• Beyond GameStop and the console makers, game publishers are expected to rack up a record holiday season, spurred by the new consoles and spending shift amid Covid-19 to at-home entertainment.

Facebook

• Morgan Stanley: ‘AlphaWise survey shows 34%/28% of Americans use IG Reels/ Shopping monthly, showcasing FB’s ability to scale new use cases. Our analyses show how these products plus FB Marketplace could add $3bn to 2021 rev. We also raise 2020 estimates on faster ad recovery. PT to $295, bull case to $350.’
• Morgan Stanley risk to the downside:
  • ‘High exposure to SMBs could pressure ad revenue in a recession scenario.’
  • ‘Negative press about privacy/data use could result in lower engagement.’
  • ‘Concerns around FB’s ability to operate the platform safely could spur regulation.’
• Facebook, New York Times Team Up on Augmented-Reality Journalism

Peloton

• Vaccine reality seeps in – time to short gold, go long oil and short PTON.
• BoA – during analyst session Peloton provided an updated view on TAM and SAM. ‘Surveys indicating that current TAM is at 75mn, while the SAM, defined as estimated households interested in purchasing one or more Peloton products at current pricing, is at 20mn households (vs 14mn prior). We think Peloton’s TAM is bigger than the 200mn global gym member base.’
• ‘Our $116 price objective is based on our DCF model that assumes 20mn subscribers long term, 26.2% long-term operating margins, a 9.8% weighted cost of capital, and a 3% terminal growth rate after 2032. We think Peloton should trade at a premium to our primary comp group on revenues and EBITDA multiples given high user retention and faster-expected growth over the next five years.’
• ‘Downside risks to our PO are: 1) multiple compression given limited profitability and lack of earnings-based valuation support, 2) emerging competition that could impact unit sales or gross margins, 3) uncertain TAM given high upfront costs, and 4) potential that in-home fitness is a fad.’

Other Ideas

• PLNT Could be $100+ by Jan. 80% of branches are open, it’s a franchisee model, and they have less than 20% cancellations in open stores; I think it surges when we reopen or a vaccine is found.
• A Bloomberg analyst’s views on Unity.
• Long ADYEY, DOCU, CRWD, FSLY, ETSY, MELI, OKTA, SHOP, TWLO, and ZM; short QQQ.
• Tesla Energy to Become $200bn Revenue Business, Piper Analyst Predicts.
• I rolled WKHS to Jan., bought PLUG Jan. calls, and sold BABA. On the genomics side, NTLA is one to watch, and MSFT is getting close to model fair value.
• Never-Dull Nikola Sized Up Favourably by JPMorgan After CFO Chat.
• I’m selling ATM SPUZ Oct. puts near 3300 to buy Dec. OTM calls.

Source: @garyblack00

• Bullish NVDA: strong demand equals bullish; supply issues are bearish but repairable; demand is harder to fix.
• Morgan Stanley: ‘adding Ally Financial to our Fresh Money Buy List in place of Procter & Gamble (PG), skewing our list toward consumer cyclical, earnings upside and a more benign default credit cycle, while locking in an 18% relative gain.’
• Goldman Conviction Buy List: BA, RTX Added – LHX, LMT Removed.

Value Play

Source: BAML

• I’ve seen many of these types of studies; the taxonomy changes through the ages – e.g. electricity, telephones and railways were once growth, etc., and are now counted as value. At some future point, Amazon or Google will be seen as utilities.
• Agreed. The nature of every sector changes: coal in the 1930s, cotton in the 1830s, railroads in the 1850s, airlines of the 1960s. They all fulfil roles in today’s societies, but the sector taxonomy and the business life cycle radically changes the margin and return profile.

Source: Market Ear, Kostin and GS

• Sports assets (within entertainment) and restaurants are appearing the cheapest vs history.

Source: Refinitiv, Morgan Stanley

• Morgan Stanley: ‘In the gaming, lodging, cruise sectors, BYD and CZR stand out as being cheap/inline vs history while benefitting from future structural tailwinds (nascent US sports betting/online gambling). Hilton and PENN have re-rated the most (~3x), but we see this as making sense as Hilton’s asset-light/model has become more attractive and PENN for the first time is getting /credit for sports betting / online gambling.’
• MSG Sports (MSGS) is their top entertainment pick. I would concur; it’s in my watchlist.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)