• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Jim Cramer

Jim Cramer: You Saw Snowflake. Now Get Ready for the Blizzard

What happens after this is likely a flurry of deals that will require more selling and that begins to cut into the tech stocks with much lower valuations like Facebook, Apple and Alphabet.
By JIM CRAMER
Sep 17, 2020 | 03:56 PM EDT
Stocks quotes in this article: SNOW, ZM, NOW, BRK.B, BRK.A, CRM, FB, AAPL, GOOGL, DOW, CAT, MMM

Markets seem reasonably priced, until there's not enough money to afford the stocks that make it up. That's the difficult and somewhat brutal lesson we are learning in the wake of Wednesday's shocking Snowflake (SNOW) deal where buyers were indifferent to ho how much they paid.

That indifference led to the utter absurdity of a stock being valued at more than 100 times sales. Not earnings. There are none. Sales. Just losses. Could be losses as far as the eye can see because the company is a hyper-growth enterprise, where it's worth it for CEO Frank Slootman to spend as much as necessary to be the leader in cloud data management and analysis.

Snowflake isn't the issue, though. Frank Slootman will deliver the best he can for shareholders, and I understand why someone would want to buy the stock. This is why I suggested that $125 seemed like a darned good level.

I was off by half.

All day, I heard that the underwriters were the issue, they priced the deal too low. Again, I disagree. They priced the deal at the highest level that could be justified. I arrived at my $120 valuation when the stock was looking $75-$80. How did I get it? I looked at what was the most expensive stock in the market, Zoom (ZM) , and said that it is worthy of that valuation. Believe me, that's a big stretch, as Zoom is growing faster than Snowflake, it may have every bit as big a moat as Snowflake and is outrageously profitable. So what were the underwriters supposed to do? Price the stock at an absurd level to the No. 1 growth company in this market when it is unproven and has a fraction of the revenues? Could they have flooded the market with more stock to keep the price down?

Again they offered 28 million shares. That's not small change. I have no idea why the bankers should be singled out for not offering enough stock. Believe me, as someone who has priced deals and had one priced for me, I think that the number of shares and the price were both well within the realm.

No, the problem was with the buyers. They lost their minds. Now some of this could be the desire to get what's known as a full position in. Lets say they do a huge amount of commission business and they put in for 10% of the deal -- the overreach that indicates you will take as much as they will give you. If you got 50,000 shares at $120, where it prices, you might be tempted to buy another 50,000 say, at as much as $180, giving you a basis of $140 slightly above Zoom, but still pretty ludicrous. But you would be up big on the position at the end of the day.

But there were so many market buyers, perhaps because of the imprimatur of Slootman, so successful at ServiceNow (NOW) , or because two companies, Berkshire Hathaway (BRK.B) (BRK.A) and Salesforce.com (CRM) both got stock on the offering price. Mark Benioff, the CEO of Salesforce, knows pretty much everyone in the tech world and is good friends with so many. He got stock on the Zoom deal from CEO Eric Yuan, and Slootman allowed him to buy $250 million for Salesforce Ventures at the $120 offering price. Far more amazing, was the Buffett's purchase, plus an additional $320 million Snowflake purchased from another unnamed shareholder. Buffett has historically pooh-poohed IPOs; it has been more than 50 years since he's been in one.

Institutions wanted this stock so badly that they sold all of the cloud stocks and many FANG stocks. The destruction of the stocks that were valued at more than 20-times sales, and there are 25 of them that are actively traded. They were almost all under assault and it led to vicious selling in the Nasdaq, where they almost all dwell.

I can understand why you may think that this is aberrant. I told you Wednesday, though, and reiterate Thursday, that Snowflake will be just the first of many, none of which will be as good as Snowflake. What happens after this is a flurry, if not a torrent or flash flood, of deals that will require more selling not just of the stocks selling at 20-times sales, but then you will begin to cut into the tech stocks with much lower valuations like Facebook (FB) , Apple (AAPL) and Alphabet (GOOGL) . These are fantastic companies, but their stocks are simply sources of funds when we get the Snowflakes.

Sometimes I think I am the only one worried about it. But Thursday I got a piece of research entitled "The Implications of IPO a Go Go," and it echoed my thoughts exactly. It talked about how there is going to be a record number of IPOs, that they will be underpriced and go to gigantic premiums and they will ultimately overrun the buyers. The digital stocks, those based on the internet, could be the worst offenders. Wow, I said, I am not alone.

And then I looked at the date: the piece was written on Nov. 30 1999 by my friend Steve Galbraith, the equity strategist, and Bernstein. The top was building and Galbraith was screaming for you to look out. He followed up with two pieces: "Jailbreak the Coming Flood of Expiring IPO Lock-ups" on March 14 2000 --almost the exact top -- and then "Jailbreak Redux No parole for Prior Good Behavior," from April 3, 2000, when the Nasdaq was struggling mightily to hold its ground before the damn broke.

Then, like now, not only were there too many underwritings and then tons of secondaries -- where many insiders sold stock and they were price insensitive sellers who knew their stocks were worth far less than they were selling for, if not worthless entirely.

I was running money back then, and Galbraith's pieces were instrumental in getting me out of the market at the top and then going short in April. He was and is one of the smartest minds in the business.

Now, before I say history will repeat itself, you need to know some mitigating factors. First, the companies coming public are excellent. Their stocks are simply too expensive. Second, there can always be a reformation, where the buyers stop being so nutty or so stupid. Third, there's so little money around to buy all of these deals that the pipeline might be cut short far earlier than many expect. Finally, the Fed is keeping rates low, while we might have stimulus: not the time to dump shares.

But what I did see happen today was a movement to inexpensive stocks historically, stocks like Dow Chemical (DOW) , which raised earnings estimates, or Caterpillar (CAT) , which may be at the cusp of a turn or 3M (MMM) , where the fundamentals are running.

If you think my takeaway is to tell you to get out now, you would be entirely wrong. I expected a correction and I am getting one. But I am putting some of my trust's ultra-large cash position, built by weeks of selling tech, back into the market. We are buying non-tech stocks that have come down with tech that aren't that expensive historically. It feels good to do so.

So, I say we don't want a redux of 1999-2000, where the Nasdaq went from 5,000 to 1,000 in a heartbeat after a huge run. We aren't nearly as undisciplined as we were then, and the merchandise is far better. But you know what? We said that in 1998 and 1999, before the insanity was unleashed, except we didn't think it was insane until after we looked back and realized we were deranged to pay such prices. 

(Alphabet, Apple, Facebook and Salesforce are holdings in Jim Cramer's Action Alerts PLUS member club.Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has positions in AAPL, GOOGL, CRM and FB.

TAGS: Investing | Stocks | Bearish Bet | Technology | Jim Cramer

More from Jim Cramer

Jim Cramer: When the Next Rate Hike Comes It's a Time to Buy Not Sell Stocks

Jim Cramer
Apr 12, 2021 6:13 AM EDT

If you want to sell in the next hike all I can say is you are listening to the bears who have been shown to demonstrate historical ignorance.

Jim Cramer: The Market Likes That There Are No Surprises From President Biden

Jim Cramer
Apr 8, 2021 3:21 PM EDT

I don't think President Biden pays much attention to the stock market at all.

Jim Cramer: We're Going to Have It Both Ways

Jim Cramer
Apr 7, 2021 3:42 PM EDT

Get used to 'hybrid' living -- a mix of stay-at-home and free-world life. So, invest accordingly.

Jim Cramer: Jamie Dimon Throws Down the Gauntlet

Jim Cramer
Apr 7, 2021 7:20 AM EDT

I find his comments about China the most compelling after his salvo about racial equality.

Jim Cramer: Economy Gets Booster Shot Without the Side Effects

Jim Cramer
Apr 5, 2021 2:56 PM EDT

Amid the vaccine rollout, we have low rates, money coming from the government to families, and a Fed committed to creating jobs. Here's what it all means for investors.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 04:44 PM EDT PAUL PRICE

    Pretty Incredible + Hard to Believe

  • 11:18 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The 5 Pillars of Exceptional Trading
  • 08:05 AM EDT BOB LANG

    Bitcoin vs. Gold: Which Should You Invest In Now?

    Read my article TheStreet here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login