Lululemon (LULU) & Snowflake (SNOW) – A Note on Insider Buying – March 30, 2024
Lululemon Board Chairman Martha Morfitt made a $1.4 million open market stock purchase this week. That raised her sizable stake by 4% to $35 million. I couldn’t find a credible source on her net worth, but this is a good piece of news for a company licking its wounds after a slightly underwhelming annual guide. Pleased to see this.
Also this week, Snowflake’s new CEO made a $5 million purchase of company stock. While I frequently say insider buying is always a bullish signal, there’s a caveat. It’s bullish if there are no competing incentives to motivate the purchase. If there are, the news doesn’t become negative; the bullish signal from it just becomes a lot weaker. What were the two incentives aside from stock bullishness here?
First, new CEOs like SNOW’s will routinely make stock purchases at the beginning of their tenures as a sign of faith in the stock. That makes stock bullishness a tad more symbolic in this case. It’s not shady or dishonest or anything remotely similar, it’s just common practice. Match Group’s Bernard Kim did the same thing; it’s routine. Secondly, CEO Sridhar Ramaswamy secured $5 million in restricted stock units (RSUs) in exchange for making this purchase. In my view, the reason for optimism at Snowflake is the prospect of ramping product innovation. Recent news like expanding its data clean rooms across hyper scalers to bolster customer confidence in data security is what to focus on. That, and likely a sandbagged guidance. This specific piece of news is not all that important in this specific case.
With regard to the sandbagged guidance, I do think the firm will crush current expectations. Zero contribution from new products and zero consumption improvement is too pessimistic. Still, that doesn’t make me love the stock at these prices.
Let’s assume it outperforms on revenue growth by 5 pts & beats current 2024 EBIT estimates by 50%. You’re still paying 150x operating profit for a 27% revenue grower & a 37% EBIT grower.
And there is a bit of fundamental concern for now. The product roadmap had been moving too slowly. It’s behind Databricks in key innovation areas like Notebooks, which Snow leadership will explicitly tell you. Finally, as a review, open source Iceberg Tables could erode demand momentum for 10% of its revenue. It could also bolster querying demand, so the actual impact will be smaller than 10%. I really do think Ramaswamy will do a great job. Still, I find myself in no-man’s land here at a still quite elevated valuation. I want (and expect) execution to get better and for the company to get cheaper. That’s not realistic; I know that. I’ll likely keep watching and rooting for the company from the sidelines.
