Shares of data-warehousing firm Snowflake (SNOW) have been difficult to buy on the dip, primarily because of the absurdly high multiple. Even after shedding more than half of its value from peak levels, the company remains one of the priciest growth stocks out there.
While its magnitude of growth and quickly improving operating margins are worth getting behind, the near-term outlook is hazier. With rates on the rise, high-growth is going to be punished further.
Snowflake is one of those incredibly innovative, game-changing cloud companies. It has high-quality growth and a pathway towards further margin expansion. I am neutral on the stock.
Snowflake Stock: Expensive
The big data company has Warren Buffett’s gold stamp of approval (probably one of his associates made the purchase).
Still, with a price-to-sales (P/S) multiple of above 77, I find it nearly impossible for dip buyers to draw the line as shares sink further into the abyss, potentially en route to the IPO price of $120 per share.
In any case, Snowflake stock still remains too rich for my liking at around $189. Yes, things are looking up for the firm on a margin front, and its CEO Frank Slootman is a genius.
However, with the recent revenue growth downgrade and an intensification of the tech bear market, the stock could get cut in half again and still be insanely expensive.
Conservative Guidance
Slootman is erring on the side of caution regarding forward-looking guidance. That’s only prudent in the face of profound macro uncertainties. Further, Snowflake’s usage-based pricing model is perplexing to many growth investors and analysts who are so used to the subscription-based pricing used by companies in the Software-as-a-Service (SaaS) universe.
While a subscription-based model would make forecasting much easier, I don’t think investors should expect such. Industry trends could shift towards a consumption-based model, and I see few reasons why Snowflake would want to change its model just to make analysts’ lives easier.
Undoubtedly, it’s hard to project consumption over a quarter-to-quarter basis. The company is guiding for 65%-67% revenue growth levels moving into the new fiscal year. That’s incredible growth, but a far cry away from the north of 100% top-line growth posted in prior quarters.
The stakes are high, and the market seems more unforgiving to those who buy high-multiple tech stocks like Snowflake on the dip.
Snowflake’s Consumption-Based Pricing
Snowflake’s focus seems to be on improving the lives of its customers. Performance improvements could eat into revenues, but at the end of the day, Snowflake wants to win over new customers because it knows it can retain and upsell them.
With the recent acquisition of Streamlit in a deal worth $800 million, the company will make one of the most intuitive pieces of data visualization software better and more secure. Snowflake is keeping the software free, but it hopes the marriage could entice even more users to give its platform a try.
It seems like Snowflake is giving up a lot of margin expansion with its consumption-based pricing model and reluctance to charge for new tools like Streamlit. In any case, such tools could act as catalysts for Snowflake’s revenues moving forward.
Significant barriers to new product offerings are knocked down with a consumption-based model. This could allow Snowflake to make the most of future upselling opportunities. If a customer wants to try a new innovation on Snowflake, they can give it a test run and pay for what they use, rather than committing to an expensive subscription.
Wall Street’s Take
According to TipRanks’ consensus rating, SNOW stock comes in as a Moderate Buy. Out of 21 analyst ratings, there are 15 Buy recommendations and six Hold recommendations.
The average Snowflake price target is $334.65, implying an upside of 76.4%. Analyst price targets range from a low of $210 per share to a high of $415 per share.
Bottom Line on SNOW Stock
Snowflake is on the cutting-edge of innovation. Other SaaS companies will likely follow Snowflake’s lead with consumption-based pricing in time.
For now, analysts may think the data-warehousing firm is well ahead of its time. However, the only thing I believe to be ahead of its time is the valuation.
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