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Proprietary Data Insights Financial Pros’ Top IT Services Stock Searches in the Last Month
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Snowflake’s Growth Hits an Ice Patch |
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Snowflake (SNOW) did just under $97 million in sales in 2018. Five years later, it came in just under $2.5 billion. Few companies have grown as quickly and profitably as SNOW. Operating cash flow exploded from $110 million at the end of 2021 to $679 million in the last twelve months. Without stock-based compensation, the company would have turned a P&L profit this year. Are we crazy to think there might be some value here? Snowflake’s Business Ah, Snowflake Inc., the data maven that’s more than just another flake in the cloud. Founded in 2012, this San Mateo-based firm is revolutionizing the way over 4,600 clients across industries manage and analyze their data. What makes this snowflake unlike any other? A unique architecture that breaks down data storage, computing, and services into independent layers, letting customers scale as they please and only pay for what they use. Besides providing a multi-cloud service compatible with big names like AWS, Azure, and Google Cloud, the company’s design allows for secure data exchanges. This creates a sort of “data network effect,” enabling live data sharing among users and organizations. In simpler terms – they allow a company to use and work with data from different sources.
Source: Snowflake Q4 ‘24 Investor Presentation Snowflake operates a consumption-based model, which means it waxes and wanes with corporate spending, making it especially sensitive to recessions. That also makes it a great leading indicator. Financials
Source: Stock Analysis Sure, SNOW is a darling for some Wall Street analysts who can’t get enough of its growth rate and innovative chops. But the financial wizards are not singing in unison. There are concerns over competition and future growth, considering the widening net loss. YoY revenue growth stands at 49.2%. Forward estimates put it at 43.4%. While that’s not a massive decrease, it’s slower and lower than the rates they’ve achieved over the last few years. Shares tumbled after the latest earnings announcement despite positive developments in generative AI products and easier comps. But SNOW doesn’t carry any debt, and its cash flow gives it ammunition to buy its way to growth. Valuation
Source: Stock Analysis SNOW isn’t alone in its ridiculous valuation. All the major IT network and infrastructure companies trade at insane multiples, none with a positive GAAP P/E. In fact, SNOW’s 73.2x price-to-cash flow ratio isn’t all that bad comparatively. Only Okta (OKTA) does better at 59.8x. Cloudflare (NET) is a bit worse at 93.8x. Growth
Source: Seeking Alpha All these companies are built on heavy revenue growth. However, SNOW is the only one to deliver close to 50% revenue growth consistently. Profitability
Source: Seeking Alpha None of these companies turn a profit on paper. So, we can only look at their gross margins and cash from operations. SNOW doesn’t have the best gross margins. And given the industry, we’d like to see it closer to 70%. However, it generates far more cash than its peers. Our Opinion 6/10 SNOW is the best of the bunch. However, it’s also pricey based on its cash flows. Like many newer companies, stock-based compensation is heavy. That should abate over time. While we wouldn’t want to play SNOW outright, this could be a good candidate for a pairs trade, where you buy SNOW and short one of the competitors. But be careful. That type of trade is best suited after a rally, not near the lows, as a squeeze on the worst-hit names can send them up faster. |
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