Snowflake (SNOW) is known for its cloud-based data platform, which the company provides in the United States and internationally.
Snowflake’s platform comprises of the innovative technology that powers the Data Cloud, enabling customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data.
More specifically, the Data Cloud is an ecosystem where Snowflake customers, partners, data providers, and data consumers can break down data silos and derive value from rapidly growing data sets in secure, governed, and compliant ways. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks).
Business Model
Data Cloud can allow for a world without data silos, allowing companies to effortlessly discover, access, derive insights from, and share data
from a variety of sources.
The process is lightning fast, and Snowflake is literally solving the decades-old problem of data silos and data governance. Due to its innovation in the industry, Snowflake is literally creating a new market here, with its solution being the most comprehensive amongst its peers. This signals massive revenue growth for the company, which is indeed the case thus far.
Snowflake receives revenues based on how it performs instead of introducing a subscription model, as is the case with most SaaS businesses in the space.
The company charges a very small amount to store its customers’ data, which represents as little as 5%-7% of total revenues. The cash cow in Snowflake’s business is in what the company does with all this data. Whenever a customer wishes to find the data and examine it, Snowflake charges that customer sequentially.
This arrangement works both for Snowflake, and its customers. From the customer’s perspective, it benefits from not being charged for a whole lot of data.
From Snowflake’s perspective, it operates a toll booth in which it makes money out of each and every use of data. Plus, since customers buy credits through which they redeem to access that data, Snowflake can somewhat predict its future revenues as well, which makes for fantastic cash flow visibility.
How To Value Snowflake
Snowflake is currently wildly unprofitable, as the company reinvests the entirety of its inflows back into growing the business. The company also reports very high levels of stock-based compensation.
It’s more beneficial, therefore, to value Snowflake based on its revenue multiples. Snowflake reported revenue growth of 103% year-over-year to $254.6 million in its Q2 2022 results.
The company is expected to deliver total sales of $1.2 billion for the full year, with revenues projected to keep growing at 50% or more over the next few years.
This sounds amazing, which is also why the market values Snowflake at a crazy multiple. At its current market cap of $102 billion, the stock has a P/S multiple of 117, which is beyond reasonable.
On the one hand, Snowflake may deserve a steep premium, and the business seems to be the future of all data handling. On the other, it’s unheard of paying such a multiple, no matter how high the gross margins can get, or how rapidly a company is growing.
Wall Street’s Take
Turning to Wall Street, Snowflake has a Moderate Buy consensus rating, based on 11 Buys, nine Holds, and zero Sells assigned in the past three months. At $324.12, the average Snowflake price target implies 4.8% downside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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