Is Snowflake (SNOW) stock a good investment?

By Kirsteen Mackay

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Snowflake provides cloud data warehousing software to some of the world's most prominent companies. It is a fast-growing tech stock with a heady valuation but its latest earnings results have analysts raising their ratings.

Cloud computing upstart Snowflake (NYSE: SNOW) has made business headlines numerous times over the past year. Its IPO in September 2020 was the biggest software IPO ever and landed amid the hype and momentum of the COVID tech stock rise. SNOW stock gained bullish interest thanks to its high-profile backing from Salesforce (NYSE: CRM) and Warren Buffett's Berkshire Hathaway (NYSE: BRKB).

In early December 2020, the SNOW share price reached a sensational high above $387. It then spent the next five months plummeting to a low of $184 in May 2021. From there it gradually climbed higher until mid-November, when it made a new high above $400. Since then, it's fallen 14%, but things are once again looking up for the cloud data warehousing firm.

Basking in upbeat earnings beat

In early December, investment bank Citigroup upgraded Snowflake (NYSE: SNOW) stock to a buy recommendation. The bank boosted its SNOW share price target to $470 after smashing expectations with outstanding Q3 earnings results.

Meanwhile, analysts at Deutsche Bank and Oppenheimer have a target price of $400. Still, several analysts rate it a hold, with the stock currently trading around or above their perceived fair value price.

Q3 saw Snowflake make meaningful gains in profitability and efficiency. While it lost 51 cents a share, this beat analyst expectations on revenue of $334.4m. FactSet analyst consensus projected a loss of 60 cents per share. Earnings per share (EPS) growth quarter-over-quarter rose 20.3%

For the three months ending 31 October 2021, Snowflake's earnings highlights include:

  • Product revenue of $312.5m, equating to 110% year-over-year growth.

  • Remaining performance obligations of $1.8 billion, representing 94% year-over-year growth.

  • 5,416 total customers.

  • A net revenue retention rate of 173%.

  • 148 customers with trailing 12-month product revenue greater than $1 million.

Serving Fortune 500 customers

Snowflake prides itself on attracting and retaining Fortune 500 customers. It now has 223 onboard, eight of which joined in Q3.

Customers of Snowflake's financial services Data Cloud include Allianz (ETR: ALV), BlackRock (NYSE: BLK), Capital One (NYSE: COF), New York Stock Exchange, Refinitiv, Square (NYSE: SQ), State Street, and Western Union (NYSE: WU). At the same time, customers of its Media Data Cloud include Disney (NYSE: DIS), Experian (LON: EXPN) and Horizon Media.

How does the future look for Snowflake?

Snowflake is continuing to deploy its services around the world. Thus, it has room to scale and further improve margins. The company helps businesses looking to advertise directly to consumers by integrating data and digital capabilities to become a self-sufficient data-driven enterprise.

However, that means Snowflake's success depends on the success of its customers because they pay for the SNOW services they need. If they're swamped, then they'll need more data services.

As Snowflake's CFO, Michael Scarpelli, acknowledged, a 5% to 7% earnings beat is a big beat for the company's business model. Therefore, it's unlikely to be repeated anytime soon.

The impressive returns were primarily thanks to a successful quarter for many of the big companies it serves. When the underlying companies experience rapid growth, that in turn should reflect an uptick in reliance on Snowflake. Therefore, helping fast-growing companies will benefit company returns. Likewise, if existing customers reduce their dependence on Snowflake's services, it will lead to a reversal in revenue growth.

Snowflake will be updating its long-term guidance at its Investor Day in 2022. Management hopes to raise its operating margin and free cash flow margins, but nothing has yet been confirmed.

As for its full-year outlook, the company will continue to operate remotely for the rest of the year. Snowflake's guidance for the full-year fiscal 2022 predicts revenues between $1.126bn and $1.131bn, representing year-over-year growth of between 103% and 104%. It also expects a non-GAAP 74% product gross margin, negative 4% operating margin, and 8% adjusted free cash flow margin.

In Q4, it estimates product revenue of $345m to $350m, which is almost double Q4 2020 revenues.

Snowflake's recent results are the reassurance shareholders were looking for. The company is growing its impressive customer line-up with plenty of room for further expansion. It also plans to continue recruiting with a focus on quality over quantity. In today's volatile market, SNOW shares could continue to experience fluctuations, but for long-term holders, the stage look set for continued growth.

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Topics:
Cloud Networking and Storage
Data
Data Processing
Industries:
Information Technology
Companies:
Snowflake

Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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