Snowflake’s NYSE: SNOW stock declined by 17% on May 25 following its latest earnings report. Despite the cloud-based data warehousing company’s revenue rise of 48% YoY to $624 million, which exceeded analysts’ expectations by $15 million, its stock still trades more than 60% below its all-time high. Let’s take a look at the bearish and bullish cases for Snowflake to see if buying the stock is worthwhile.
Bearish Case for Snowflake
Snowflake collects data from a vast range of computing platforms across an organization and stores all the data in a centralized cloud-based data warehouse. Its growth in product revenue, which accounted for 95% of its first-quarter revenue, has slowed down since its IPO. Its net revenue retention rate, which gauges its YoY revenue growth per existing customer, has also been declining. Snowflake’s product revenue is expected to only increase 33%-34% YoY in Q2, which is slowing down due to macro headwinds, which curb enterprise spending on software upgrades. Data warehousing platforms similar to Snowflake, such as Amazon Web Services’ Redshift, Microsoft’s Azure Synapse, and Alphabet’s Google BigQuery, are fierce competition for Snowflake. These companies bundle their own data warehousing services into their cloud infrastructure platforms, causing potential difficulty for Snowflake to grow over the long haul.
Snowflake’s net loss widened YoY from $166 million to $226 million in Q1 2024 because of stock-based compensation expenses that consumed 46% of its revenue. Due to these expanding losses, the company is deeply unprofitable on a GAAP basis and will probably stay unprofitable for the time being. Lastly, Snowflake’s enterprise value of $53.7 billion is 21 times higher than its estimated product revenue for fiscal 2024, which could weigh down its stock in this volatile market.
Bullish Case for Snowflake
The company aims to generate $10 billion in product revenue in fiscal 2029, and analyses suggest that Snowflake could grow its product revenue at a compound annual growth rate of 32% to reach that target. Even if it only trades at 20 times sales in fiscal 2029, the stock could be worth roughly $200 billion that year, marking almost a quadruple gain in today’s values. Users of Snowflake’s flexible usage-based model are accessed through third-party applications, which will continue to make it an attractive alternative to the bundled services of Amazon Web Services, Azure, and Google Cloud.
Though Snowflake is unprofitable on a GAAP basis, it can gradually reduce its stock-based compensation as its FCF improves. All of Snowflake’s non-GAAP product gross, operating, and adjusted FCF margins – which exclude stock-based compensation – improved considerably over the past three years. In Q1 2024, the company expects expansion in these areas, including a non-GAAP product gross margin of 76%, a non-GAAP operating margin of 5%, and an adjusted FCF margin of 26%. Snowflake hired about 1,900 new employees in fiscal 2023 and plans to hire another 1,000 new workers in fiscal 2024; this implies Snowflake is in much better financial shape than tech companies which have executed mass layoffs.
Currently, Snowflake is a well-run company with plenty of growth potential. However, its stock is priced for perfection and it has been delivering less than ideal outcomes. For the time being, it would make more sense to hedge towards the bearish case against Snowflake until its valuations lower, macroeconomic headwinds ease, and its top-line growth stabilizes once more.
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