❄️ Is Snowflake’s Red Hot Valuation Justified?
NVIDIA upbeat; Amazon may drop Visa.
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❄️ Snowflake: Red Hot Valuation?
Snowflake Inc. (SNOW) was the largest software IPO last year, and shares zoomed after that, eventually hitting a brief period of correction. The stock is back to all-time highs. But with decelerating revenue growth, is the company’s valuation justified? (Tweet This)
Growth Is The Only Mantra
Cloud computing is everywhere, but what good is it if companies struggle to have their data on the cloud? Snowflake enables companies to get their data on the cloud and has a proprietary technology that optimizes the data for better analytics, scale, and ease of use.
It had a blockbuster IPO last September, and shares zoomed to the stratosphere before dropping back to terra firma on high valuation concerns and general inertia in companies when transitioning to the cloud.
Snowflake’s CEO, Frank Slootman, urged shareholders to be patient while working with customers who do not have their entire cloud-based systems. Since the May low of $184.7, the share price has rebounded, and how! It is back to trading near its December 2020 high of $420.
Last month, Snowflake partnered with UiPath with the goal to improve data processing times and enable deeper long-term data analysis. Snowflake expects this partnership to help it fulfill the $1.5B worth of unfulfilled contracts it has on its books. That was enough for the stock to start shooting up!
While the company continues to work with customers with their cloud transition and there are issues with the speed of that transition, Snowflake envisages a long and smooth runway of growth for itself. It expects to cross $10B in annual revenue by FY29.
This bullishness on the part of the company and the inexorable trend in cloud data warehousing was enough to prompt even Warren Buffett to buy 6M shares of Snowflake for a little more than $700M. Today, that stake is valued at $2.5B.
In Q2, the company reported revenue of $272.2M, crossing the $1B annualized revenue run-rate for the first time. 458 net new customers were added, taking the total customers to ~5K. Out of these, 116 are generating more than $1M in revenue. That number has grown by 107% Y-o-Y.
How High Is Too High?
Revenue in Q2 rose 104% Y-o-Y, down from the 110% growth it saw in Q1. For Q3, the company's revenue guidance of ~$285M will mean a growth rate of ~90% Y-o-Y. These are great numbers, no doubt, but the trend line is decidedly on a negative slope. Snowflake's losses more than doubled in Q2 to $189.7M, from the $77.6M it lost during the same period last year.
Although its revenue growth is the fastest among its software peers at its scale, its valuation seems too lofty to digest unless one ignores some of the traditional metrics. At its current price, Snowflake's trailing 12-month (TTM) price to sales ratio is a staggering 130.35x.
At the same time, the company's TTM Return on Assets stands at -12.98%, and TTM Return on Equity is -26.56%. Also, consider that for a market cap of ~$120B, Snowflake's annual revenue run-rate has just managed to cross the billion-dollar mark. That compares to Caterpillar, whose profits alone are higher than all of Snowflake's revenues!.
On the other hand, it's not a just comparison to make. Cloud data warehousing as a market is just getting started, and Snowflake will be at the center of all action for years to come. The competition it needs to watch against is the familiar triumvirate - Amazon, Microsoft, and Google - with their cloud offerings and much deeper pockets that could disrupt Snowflake's swift run so far.
And that's how things stack up for Snowflake. Genuine concerns that are juxtaposed with a market space that's set to grow long into the future in the face of a stock market that's being propelled further and faster like there's no tomorrow! Shareholders don't seem to have any bones to pick for now.
Market Reaction
SNOW ended at $398, down 0.97%. Shares are up 43% this year.
Company Snapshot 📈
SNOW $398.00 -3.89 (0.97%)
Analyst Ratings (29 Analysts) BUY 52% HOLD 48% SELL 0%
Newsworthy 📰
Confidence: NVIDIA forecasts upbeat revenue on metaverse hopes (NVDA +5.16%)
Uncertainty: Cisco forecast knocked by supply chain snag, shares fall (CSCO -6.08%)
End: Amazon may drop Visa as partner on US credit card (V -4.70%)
Later Today 🕒
Alibaba Group Holdings Earnings (BABA)
Intuit Inc. Earnings (INTU)
Applied Materials Inc. Earnings (AMAT)
Workday Inc. Earnings (WDAY)
Macy's Inc. Earnings (M)
Kohl's Corporation Earnings (KSS)
Brady Corp. Earnings (BRC)
Palo Alto Networks Inc. Earnings (PANW)
Ross Stores Inc. Earnings (ROST)
ResMed Inc. Earnings (RMD)
Broadridge Financial Solutions Inc. Earnings (BR)
Farfetch Ltd. Earnings (FTCH)
Nuance Communications Inc. Earnings (NUAN)
Williams-Sonoma Inc. Earnings (WSM)
Woodward Inc. Earnings (WWD)
Post Holdings Inc. Earnings (POST)
Maximus Inc. Earnings (MMS)
Beacon Roofing Supply Inc. Earnings (BECN)
7:00 PM IST: Initial Jobless Claims
8:30 PM IST: Leading Economic Indicators
Today's Market Terminology: Long-Term Debt
Long-term debt is debt that matures in more than one year and is treated differently from short-term debt. It is a liability that must be repaid while owners of the debt account for them as assets
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