Shares of data-warehousing service provider Snowflake (SNOW) heated up last week, despite the recent market decline, after a solid quarter that caught many analysts and investors off guard. Undoubtedly, its usage-based revenue model caused some analysts to be more cautious. Though a recession can weigh on SNOW, I view the secular trends powering its growth as strong enough to give SNOW stock a “free pass” from the latest round of market punishment.
In a prior piece dated August 12, I stated that Snowflake did not “deserve to be grouped with the rest of its fallen speculative tech peers” and that “the stock had plenty of room to run.” Even after last week’s massive jump, I remain incredibly bullish on the stock.
Snowflake overshot to the downside during the worst of the first-half market sell-off. In addition, the shockingly good second quarter is also likely to bring forth a wave of analyst upgrades that can help Snowflake resume its recovery, even as its peers retest those ominous June lows.
Snowflake’s Second-Quarter Results Showed Strong Growth
With recessionary concerns taking a bite out of other enterprise software companies (look no further than Salesforce (CRM), which had to downgrade guidance), it’s remarkable that Snowflake was able to continue flexing its muscles. The company reported $497 million in revenue for Q2, up 83% year-over-year.
Though Snowflake still generated a GAAP loss of $0.70 per share, such losses were more than forgivable, given the magnitude of top-line growth posted in the quarter.
Looking ahead to the third quarter, the outlook calls for revenue to fall in the middle of its guidance. I still think that’s too conservative, given Snowflake’s growth could snowball into and out of a coming recession.
The usage-based revenue model seems to be a source of huge earnings surprises. Even with an IT spending slowdown on the horizon, I think Snowflake can pull off yet another extraordinary beat.
Snowflake: Expensive, but “Undervalued” Relative to Its Growth Potential
Many software-as-a-service (SaaS) companies have seen their multiples contract rapidly through the first half of the year. Indeed, such battered hyper-growth companies may prove “more undervalued” than some of the traditional value stocks these days. Though there are a sea of “cheaper” software companies out there, nothing quite stacks up to Snowflake. It’s a growth company that’s one of few that deserves to trade at a P/S multiple north of 20x.
At writing, shares of Snowflake trade at 36.2x sales. That’s incredibly expensive to those who don’t have a full grasp of the type of growth profile that Snowflake possesses.
The usage-based model seems like a huge inconvenience to those analyzing the company. However, the model is to the benefit of existing and prospective customers. Further, I’d argue that it’s also to the benefit of long-term investors, given such a light model doesn’t require as many overhead expenses to tie down new customers. With a recession potentially looming, the last thing enterprises want to do is to be locked into a contractual obligation.
I drove these usage-based model “pros” home in prior pieces covering Snowflake stock.
At the end of the day, Snowflake’s unique revenue model seems future-proof. It can help Snowflake win new customers without excessive expenditures in the beckoning process.
Snowflake: More M&A Moves May Prove Wise
As economic storm clouds move in, I’d look for Snowflake to get just a bit busier on the acquisition front. The ability to grow without excessive reinvestment will allow Snowflake to build up a nice cash cushion over time. The extra cash can be used in strategic M&A to beef up per-customer usage of the platform.
Such acquisitions may cause some analysts to scratch their heads, though. Snowflake’s Streamlit acquisition was a genius one, in my opinion, but there were a few critics who didn’t seem to understand the deal.
Paying a pretty penny ($800 million) for an open-source framework doesn’t seem to make a lot of sense on the surface. Streamlit was a startup that didn’t have much to show in terms of revenue growth. Given that, the deal did not seem to make a lot of sense.
Streamlit was not a revenue driver on its own. The tool, which helps customers more easily build data apps, does seem to be useful at inspiring existing Snowflake customers to up their usage.
Amid the implosion in tech startup valuations, Snowflake could tack on a handful of intriguing tools that can lead to greater usage. The more customers actually use the Snowflake platform, the more value they’ll stand to create for their own businesses.
By acquiring intriguing startup firms, Snowflake is effectively putting new tools in the hands of customers. My guess is that a big chunk of customers will explore new ways to use such tools.
What is the Price Target for SNOW Stock?
Turning to Wall Street, SNOW stock comes in as a Moderate Buy. Out of 31 analyst ratings, there are 22 Buys, seven Holds, and two Sells.
The average Snowflake price prediction is $204.37, implying upside potential of 9.6%. Analyst price targets range from a low of $125 per share to a high of $274 per share.
Conclusion: Snowflake Still Isn’t as Expensive as It Looks
Snowflake isn’t as expensive as it looks right now. Sure, the 36.2x sales multiple is offputting, and so are some of its prior M&A moves. Still, there’s no denying the power of the platform and the growth profile.
As analysts digest the blowout second quarter, upgrades could power shares higher, even if the broader market’s June-August recovery gains are to be given back.
