Snowflake (NYSE:SNOW) is apt the astir costly buy-rated banal successful my sum universe. The institution has traded astatine the apical of the tech assemblage successful presumption of valuation ever since it came nationalist and the rising involvement in generative AI has lone helped the institution proceed that trend. SNOW has posted resilient maturation rates successful spite of the pugnacious macro situation though it has felt a quantifiable impact. The institution has a nett currency equilibrium expanse and is generating affirmative escaped currency flow, 2 features that assistance to amended its fiscal information adjacent if macro conditions worsen. While the banal is by nary means cheap, I proceed to complaint the banal a bargain arsenic a pure-play concern connected the maturation of data.
SNOW Stock Price
SNOW crashed successful 2022 and recovered this twelvemonth similar different tech stocks, but during that full play maintained a premium valuation. Generative AI has lone accrued the value of information - this is nary hype-driven rally.
I last covered SNOW successful July wherever I explained wherefore the company’s concern with Microsoft Azure (MSFT) was a crippled changer. The institution continues to presumption itself to payment from the generative AI opportunity.
SNOW Stock Key Metrics
In its astir caller quarter, SNOW delivered 36% YoY gross maturation to $674 million, marking a sequential step-down from the 48% YoY maturation posted successful the archetypal quarter. Cloud optimization continues to unit SNOW and different unreality plays.
SNOW inactive delivered 30% YoY maturation successful remaining show obligations (‘RPOs’) which ranks adjacent the apical of the tech sector. One tin reason that specified maturation is not capable to warrant the existent valuation, but again macro is pressuring that number.
SNOW continued to turn its lawsuit number - not an casual feat fixed that organizations person shown greater hesitancy successful embarking connected exploratory IT spend.
SNOW saw its nett gross retention complaint diminution to 142%, the 6th consecutive 4th of sequential declines since the institution peaked astatine 178%.
Like galore different tech peers, SNOW has offset the pressured top-line maturation with borderline expansion. SNOW doubled its non-GAAP operating borderline to 8% arsenic it realized operating leverage. A important constituent of the operating leverage thesis is that income commissions are considerably little connected renewed contracts.
With minimal CapEx needs, SNOW is besides generating affirmative escaped currency flow. I enactment that escaped currency travel tin alteration greatly 4th to 4th owed to seasonality.
Unlike different tech peers who person taken vantage of the pugnacious macro situation to bash ample layoffs, SNOW has continued to turn its headcount. This is mostly influenced by the information that the banal has continued to commercialized astatine premium valuations.
SNOW ended the 4th with $4.9 cardinal of currency and nary debt, representing a bulletproof equilibrium sheet.
Management reiterated expectations for $2.6 cardinal successful merchandise gross this year. Given that the institution has already generated $1.23 cardinal successful merchandise gross successful the archetypal fractional of the year, this guidance looks conservative. The flip broadside to that is that Wall Street is apt to beryllium disappointed if SNOW does not extremity up materially beating connected guidance.
On the conference call, absorption noted that they did not repurchase immoderate banal successful the 4th but mean to “opportunistically” repurchase shares. I proceed to presumption stock repurchases arsenic a mediocre usage of superior fixed the stretched valuation. Management noted that successful spite of the pugnacious macro environment, they executed powerfully connected renewals, with 1 lawsuit renewing a $100 cardinal three-year term. I punctual readers that SNOW operates connected a consumption-based model, with customers committing to a minimum spend.
While SNOW has not yet seen a worldly interaction from the emergence of generative AI, absorption remains of the presumption that “being highly organized connected your information is going to go a premium thing.” A perchance overlooked interaction from generative AI is that it whitethorn assistance bring a quicker extremity to unreality optimization headwinds arsenic customers whitethorn privation to clasp much information to let for amended AI outcomes.
Is SNOW Stock A Buy, Sell, oregon Hold?
SNOW is simply a information warehouse and information lake, enabling its customers to store and negociate structured and unstructured data. Generative AI has lone made information much invaluable than ever earlier portion besides adding tailwinds to the “growth of data” thesis.
Management has fixed FY29 guidance of $10 cardinal successful merchandise gross and 25% non-GAAP operating margins. Free currency travel margins are expected to beryllium higher astatine astir 30% owed to some the prepaid gross exemplary of bundle arsenic good arsenic higher involvement income earned from the higher involvement complaint environment.
As of caller trading, SNOW was trading rather richly astatine astir 18x sales. Wall Street has shown large assurance successful the maturation of information thesis.
SNOW does not look inexpensive connected an net ground until galore years later.
With the tech betterment good underway, specified valuations whitethorn not beryllium truthful crazy. Close rival Databricks precocious raised implicit $500 cardinal astatine a $43 cardinal valuation. As portion of the raise, the institution noted that it had reached a $1.5 cardinal annualized gross run-rate, with a 50% YoY maturation complaint successful its latest quarter. That implies a valuation of astir 29x sales, an exceedingly premium valuation. Yes, Databricks is generating a faster maturation complaint than SNOW but SNOW besides has a larger gross base. I again presume 25% maturation exiting fiscal 2029, 30% semipermanent nett margins, and a 1.5x price-to-earnings maturation ratio (‘PEG ratio’). That implies an 11.3x price-to-sales valuation successful FY29, oregon a banal terms of $375 per share. That suggests astir 17% imaginable yearly upside implicit the adjacent 5.5 years.
What are the cardinal risks? Valuation is the astir important concern. SNOW volition request to spot an acceleration successful gross maturation arsenic good arsenic prolong elevated maturation rates for galore years successful bid to warrant its valuation. If SNOW stumbles connected its maturation trajectory past I wouldn’t beryllium amazed to spot its valuation compress meaningfully. Competition whitethorn prime up, possibly from the likes of Databricks, and that whitethorn unit maturation rates. It is imaginable that SNOW has earned a premium valuation successful portion owed to the information that Berkshire Hathaway (BRK.B) owns a involvement successful the institution (which it acquired erstwhile the institution came public). If BRK.B sells disconnected this stake, past the valuation whitethorn compress. This is simply a banal that is well-loved by Wall Street and that is intelligibly disposable successful the valuation.
While SNOW is intelligibly richly valued, I reiterate my bargain standing for the banal owed to my assurance successful the semipermanent trajectory of the maturation of data, though enactment that determination are cheaper buying opportunities elsewhere successful the tech sector.
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