All the market hype is now focusing on the world of technology stocks, especially after the massive run-up in names like Nvidia Corporation (NASDAQ: NVDA) and other companies involved with the rise of artificial intelligence trends taking over today's economy and financial markets. There is another trend, however, hiding in plain sight.
For reasons that will become clear in just a minute, the business cycle is about to see a newfound boom and bullish momentum to follow, meaning that the business services sector is likely going to be the one to boom next as more and more firms seek the aid of organization and scalability in this new wave.
This is why businesses like Snowflake (NYSE: SNOW) could soon be the next target for investment dollars to find a home. Currently, this may seem like only an idea. But you will shortly uncover the actual trends showing why this is more a reality than a theory. But more on that later. First, a few pointers to guide you along the way.
All roads lead to Rome
The United States economy is beginning to heat up. You can follow this trend by checking the past few months of employment and business activity data. Businesses are getting ready to get their pre-COVID groove back with all of the efficiency that maybe wasn't present then.
According to the latest employment situation report, the economy added up to 353 thousand jobs in the past month, far from being a stagnant trend of economic activity; this means that companies that enable the employment transition to go smoothly are likely to see a bid higher in their prices.
The best example in this scenario is Intuit Inc. (NASDAQ: INTU), a stock that is now flirting with its former all-time high prices; as businesses need to account for their new expenses and payroll necessities on this new hiring spree, traders took Intuit for a bull ride, one that could spill over into other key names like Snowflake.
Now that the FED is also proposing interest rate cuts for this year, business activity will likely keep expanding to create further demand for these companies. According to the FedWatch tool from the CME Group Inc. (NASDAQ: CME), traders are pricing in these potential interest rate cuts as soon as May of this year.
Because Snowflake has underperformed Intuit by as much as 12% over the past twelve months, relative valuation metrics and price action will show you just how big of a gap this stock could fill shortly.
More than that, it has also outperformed the Technology Select Sector SPDR Fund (NYSEARCA: XLK) by as much as 26.2% over the past six months, meaning that within the world of tech, Snowflake does have preferential treatment from the markets.
Does the market agree?
Starting with Wall Street analysts, those working for Truist Financial Corp. (NYSE: TFC) have upped their price targets up to $250 a share ahead of the coming quarterly earnings announcement from the company, implying that they could be expecting really good things to be revealed by management this time around.
More than that, Snowflake has attracted the attention of other players in the financial industry; investment houses like the Vanguard Group and Berkshire Capital Holdings have added to their already sizeable stakes in the stock by as much as 8% and 39.2%, respectively, as of February 2024.
As an additional check of sentiment in this stock relative to peers who are just as essential in this hiring spree across the economy, you can see how markets are pricing this stock today as a gauge of sentiment.
Signing new hiring documents and other agreements, DocuSign Inc.(NASDAQ: DOCU) could be considered a worthy adversary to take away from Snowflake's spotlight, but markets already made their choice.
Basing your test on the price-to-earnings ratio, it would make sense that markets and investors would be willing to overpay for a good thing, such as the case in Snowflake. With a 206.6x P/E, some would turn away from his "expensive" name. But remember the saying, "It must be expensive for a reason."
Peers like Intuit only trade at a P/E of 67.5x, representing less than half of Snowflake's valuation. Because Intuit already had its run and announced higher earnings, its P/E ratio is now coming down.
Similarly, the high valuation in Snowflake could be a sign of markets expecting to see a boom in earnings followed by a similar advance in the stock price come earnings time.
