Stock Analysis & Ideas

Snowflake Stock: Hyper-Growth at a Reasonable Price

Story Highlights

Snowflake came off a solid but confusing quarter that was initially punished by investors. With an industry focus and a share price near IPO levels, could the once-hot momentum stock be a great value on this dip?

Shares of data-lake and data-warehousing firm Snowflake (SNOW) melted down below its IPO price of $120 per share immediately following the release of its solid quarterly results, only to recover the ground lost during the last few trading sessions.

Indeed, Snowflake is an easy company to misunderstand. Whether it’s the nature of the business of big data, its unique consumption-based revenue recognition model, or the recent deceleration of its growth rate amid the broader market’s souring for high-multiple tech stocks, it’s clear that Snowflake has been through the perfect storm of headwinds as of late. Thus far, it’s been a storm that’s proven too much for investors.

Are Investors and Analysts Too Quick to Cool on Snowflake Stock?

Snowflake’s valuation reset has been rapid and unforgiving to dip buyers. From just north of $400 to slightly below the $120 IPO price last week, it’s been quite the slide for one of the fastest-growing companies in this market.

Wall Street analyst price target cuts have been incredibly discouraging for SNOW shareholders. RBC Capital is one of the latest to slash its price target by a substantial amount (to $235 from $325), citing multiple compression as the primary reason for the cut.

While Snowflake’s stock got a bit ahead of itself during the euphoric 2020-21 bull run in tech stocks, I still think there’s a lot of value to be had in SNOW as it hovers around its IPO price of $120 per share.

After enduring a nearly 70% drop from peak to trough, Snowflake stock trades at 34 times sales, making it still one of the “priciest” plays in this market. Despite the hefty multiple, I think Snowflake is more than capable of growing into such a multiple, even in the era of higher interest rates.

With a wonderful CEO in Frank Slootman running the show and a share price closing in on Berkshire Hathaway’s (BRK.A)(BRK.B) price of admission, I remain incredibly bullish on SNOW stock.

Snowflake Stock: Solid Start to Fiscal 2023

Snowflake clocked in a decent first quarter, but investors were initially unenthused, with shares sagging about 14% in the after-hours session before closing down 4.5% the following day. Though revenue growth of 84% was applaud-worthy, investors wanted to see a bit more progress on the margin front.

Snowflake is on the cusp of a potential push into profitability, with adjusted operating margins forecast to be 1% for Fiscal 2023.

The company seems to have laid out a growth foundation that doesn’t require substantial capital expenditures. The recent slowdown in revenue has been a cause for concern. Indeed, the triple-digit revenue growth days seem to be over.

Revenue growth has decelerated from over 100% to 84% for the first quarter, with more deceleration to 65-67% expected for the full fiscal year. The company’s usage-based revenue model is not doing it any favors this time of year, with the macroeconomic picture showing signs of decay.

Still, Slootman and company remain focused on the road ahead, insisting that the usage-based pricing model, which does nothing to smoothen out quarter-over-quarter volatility, will pay off over the long run.

With the acquisition of Python-based app framework Streamlit, Snowflake seems to be giving its customers — especially those involved in data science— more of a reason to increase their usage.

Undoubtedly, a usage-based model is inconvenient for investors, given how much volatility it introduces on a quarter-to-quarter basis. However, as the company continues adding more features and functionality, usage is bound to increase, potentially paving the way for significant unforeseen upticks in consumption.

Give customers more valuable tools, and they’re bound to use them.

With a recession likely looming, some firms have responded pre-emptively. Some are pausing hiring, while others are laying off a percentage of their employees. Given economic factors enticing firms to cut back on spending across the board, it’s quite remarkable that Snowflake has been able to boast a 174% net revenue retention rate (used to gauge sales growth of existing customers).

Once the economy stops dragging its feet, Snowflake could easily experience a reacceleration in its growth rate as corporate budgets increase and firms begin to increase usage on platforms like Snowflake. For now, Frank Slootman seems to be conservative with his guidance in the face of such tremendous economic uncertainty.

Wall Street’s Take

Turning to Wall Street, SNOW stock comes in as a Moderate Buy. Out of 29 analyst ratings, there are 21 Buys, seven Holds, and one Sell recommendation.

The average Snowflake price target is $202.62, implying upside potential of 46.6%. Analyst price targets range from a low of $120.00 per share to a high of $415.00 per share.

The Bottom Line on Snowflake Stock

Snowflake isn’t ready to pull the brakes on innovative efforts, even as the economy sinks. Though the company has a platform that can grow without constant reinvestment, catering to specific industries could act as a significant spark for revenue growth by bringing in new customers and inspiring existing ones to up their consumption.

Undoubtedly, Snowflake’s industry focus could be key to unlocking the next wave of growth as the company looks to mature and improve upon its operating margins.

There’s still a ton of growth left in the tank, even though the best days of growth are behind it. Once the economic headwinds turn to tailwinds, Snowflake stock’s momentum could reverse in a hurry.

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