Breaking News
Investing Pro 0
New Year’s SALE: Up to 40% OFF InvestingPro+ CLAIM OFFER

Down 65%, Snowflake Still Has a Big Valuation Problem

By Vince MartinStock MarketsDec 05, 2022 10:28AM ET
www.investing.com/analysis/down-65-snowflake-still-has-a-big-valuation-problem-200633138
Down 65%, Snowflake Still Has a Big Valuation Problem
By Vince Martin   |  Dec 05, 2022 10:28AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
SNOW
-3.18%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • Once the most expensive stock in the market, SNOW still isn’t cheap
  • Upside potential is attractive — but hardly compelling
  • This is an outstanding business, but the lesson of this market remains: price matters

In 2021, the equity market completely threw caution to the wind when it came to valuation. Data software provider Snowflake (NYSE:SNOW) was one of the more extraordinary examples.

Not long after its initial public offering in September 2020, and then again in November last year, SNOW stock traded for well past 100 times revenue. Bear in mind that after the dot-com bubble burst, Sun Microsystems chief executive officer Scott McNealy famously detailed the logic against paying even ten times revenue.

It would seem close to impossible to make money buying a stock at 100 times revenue unless that stock is, say, a biotechnology firm with close to zero sales. Snowflake was and is not that kind of company: total revenue in fiscal 2022 (ending January) cleared $1.2 billion.

And, at least so far, it has been impossible to make money in SNOW at that multiple. Shares are down more than 60% from their peak. Yet, incredibly, after that decline, Snowflake still has a seemingly significant valuation problem.

Looking to 2029

Any investor buying or owning Snowflake stock obviously is doing so with a long-term focus. The stock is one of the most expensive in all of the software — but it’s also one of the fastest-growing. Revenue is expected to increase by about 70% this year. On the third quarter conference call last week, Snowflake gave preliminary guidance for 47% top-line growth in fiscal 2024.

The company itself sees a long runway. In its third quarter presentation, Snowflake reiterated its targets for fiscal 2029. Revenue should come in at about $10 billion, up from roughly $2 billion this year. Adjusted operating margins are expected to hit 20%, implying $2 billion in operating profit, with adjusted free cash flow at about $2.5 billion.

That’s the good news. The problem is that with a fully-diluted market capitalization above $50 billion, SNOW trades at roughly 20x FY29 free cash flow and perhaps 30x earnings even if it hits its targets.

That’s far from guaranteed, of course, but assume Snowflake does deliver on its promises. And assume that, six years from now, the stock trades at, say, 50x free cash flow and 65x earnings. Those multiples suggest a market capitalization in the $125 billion range.

The Case Against SNOW

That’s a 150% return from current levels — good if you can get it, certainly. But there’s another factor to consider: those adjusted figures exclude stock-based compensation.

Snowflake’s share count will increase substantially over this period as employees receive and exercise stock options. The company has granted more than 9 million restricted stock units just through the first three quarters of fiscal 2022, per figures from the 10-Q. A similar pace going forward would get the diluted share count in the range of 400 million by the 2029 target date.

To be sure, this rough model still suggests SNOW stock can double, or even a little better, over the next six years. But that’s only annualized returns in the range of 13% or so.

Again, that’s good if you can get it, but this model assumes that pretty much everything goes right. Snowflake hits its targets, the stock remains expensive six years from now, competition doesn’t arrive (or improve), and the broad market doesn’t tank. It’s simply difficult to see that kind of return as being compelling, given how much needs to go right to get it.

Buying Quality

To be clear, this is not an argument for shorting SNOW. Shorting a good business based solely on valuation concerns is almost always a fool’s errand — and this is a good business.

That’s putting it mildly. Increasingly, Snowflake looks like a transformative business, even in a ‘Big Data’ field with no shortage of innovators. Net revenue retention in the third quarter was 165%, showing that existing customers aren’t just sticking around but spending more heavily.

As SNOW bulls will point out, the company even garnered an investment from Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb). And even though Berkshire head Warren Buffett likely didn’t direct the investment himself — it seems likely to have been the work of lieutenants Todd Combs and Ted Weschler — the firm’s imprimatur is valuable. Few investors better hew to the rubric that “price matters” more than Berkshire.

Of course, that fact, in one way, only highlights the current valuation concern. Berkshire did invest in Snowflake, but at the time of the IPO and at the IPO price.

That price? $120 per share, or roughly 20% below Friday’s close.

Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.

Down 65%, Snowflake Still Has a Big Valuation Problem
 

Related Articles

David Moenning
Has a New Bull Arrived? By David Moenning - Jan 30, 2023

In last week's meandering market missive, I opined that, "the next major trend - in either direction - is likely to be driven by the outlook/expectation for the state of the...

Down 65%, Snowflake Still Has a Big Valuation Problem

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (4)
Ali Raza
Ali Raza Dec 08, 2022 5:01PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
03085435297
Gustav Bergström
Gustav Bergström Dec 05, 2022 3:03PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Nasdaq is full of *******
Rk Afghan
Rk Afghan Dec 05, 2022 1:47PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
1236858
Najma Khadar
Najma Khadar Dec 05, 2022 12:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
2520 6347 0840 4
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email