Cloud data warehousing provider Snowflake Inc. (SNOW, Financial) is at an inflection point. Next month, the company will announce fiscal second-quarter 2024 results. As it provided weak revenue guidance in the previous quarter, investors are hoping to not see a repeat. The company has several pros and cons to consider now, but it appears the core concern is the elevated valuation.
Let’s take a closer look at the company's main challenges, risks and opportunities.
Positive aspects
Snowflake highlighted some positive developments in its first-quarter earnings report.
Among the most notable improvements was 50% year-over-year growth in product revenue, while its net revenue retention rate was solid at 151%. It also recorded a 29% increase in total customers to 8,167. Among its customers that are Forbes Global 2000 companies, Snowflake saw a 15% increase to 590.
Overall, the report indicates Snowflake has been expanding its customer base rapidly. This growth is being driven by the increasing demand for cloud-based data warehouse solutions. As a result, the company has been growing its revenue at a rapid pace. In the most recent quarter, sales grew 110% year over year as a direct result of the increasing adoption of its platform.
Snowflake also has a very large and growing market opportunity. According to Infiniti Research, the global data warehouse-as-a-service market was valued at $4.60 billion in 2021. Between 2022 and 2030, it is expected to grow at a compound annual rate of 22.8%. The revenue forecast is for $27.10 billion in 2030.
Since it is one of the leading cloud-based data warehouse providers, the company is well-positioned to capitalize on this growth.
Snowflake has also partnered with some leading cloud providers, including Amazon's (AMZN, Financial) Amazon Web Services, Microsoft's (MSFT, Financial) Azure and Alphabet's (GOOG, Financial) Google. These partnerships give the company access to a wider range of customers and help to accelerate its growth.
Another positive is its management team is highly experienced and has a proven track record. For instance, CEO Frank Slootman has a long history of success in the technology industry.
Potential risks
There are also some risks to consider, including competition, pricing and regulatory concerns.
Snowflake faces stiff competition from other cloud-based data warehouse providers, including Amazon Redshift and Google BigQuery. These providers are also growing rapidly and could pose a threat to its market share.
Its pricing policy also poses a risk. If the company charges more for its services than its competitors, it could have a hard time attracting new customers and even retaining those it has.
The data warehouse industry is also subject to several regulatory risks, including compliance with data privacy laws and compliance with cybersecurity regulations. Snowflake stores data for a wide variety of customers, and these customers may be subject to different data privacy laws. For example, customers in the European Union are subject to the General Data Protection Regulation, which imposes strict requirements on the collection, use and storage of personal information. As such, the company must ensure that it complies with all applicable data privacy laws in order to avoid fines and penalties.
Snowflake must also comply with a variety of cybersecurity regulations, such as the Cybersecurity Act of 2015 and the Federal Information Security Management Act. These regulations require the company to implement and maintain appropriate security controls to protect customer data from unauthorized access, use, disclosure, disruption, modification or destruction.
Overall, these risks could negatively impact Snowflake's business and financial performance.
Financials
Shares of Snowflake have gained around 32% so far in 2023 and about 38% over the past year.
The stock performance, however, does not appear to be aligned with the company's financial performance. In May, Snowflake posted beats for first-quarter revenue and earnings, but its guidance was disappointing.
Snowflake reported adjusted earnings of 15 cents per share, above the 5 cents expected by Refinitive analysts, while revenue of $624 million topped projections of $608 million.
Looking ahead, the company said it expects product revenue will be between $620 million and $625 million in the fiscal second quarter. This was much lower than the $649 million analysts at StreetAccount were projecting, however..
Further, Snowflake’s revenue grew 48% year over year in the first quarter of fiscal 2024, but that growth was lower than the 85% increase recorded in the prior-year period.
This begs the question: Is there a revenue growth problem? The super growth of 173.88% in 2020, 123.63% in 2021 and 105.95% in 2022 lost momentum in 2023 with revenue growth of only 69.41%. The quarterly trend also appears to be weak as, for the past four consecutive quarters, the growth figures were 17.73%, 12.02%, 5.74% and 5.87%.
Further, the company has not generated profits yet, and even worse it annual net losses are widening. The net income has gradually declined from -$178.03 million in 2019 to -$348.54 million in 2020, -$539.1 million in 2021, -$679.95 million in 2022 and -$796.71 million so far this year.
As of the three months ended April 30, the operating margin is -43.28%. The margin has been negative since October 2019. If Snowflake is not able to report a positive margin soon, it will be very hard to achieve a positive net income.
Valuation concerns
Then there is its lofty valuation. The company has a GF Value of around $597, implying it is significantly undervalued based on its historical ratios, past financial performance and analysts' future earnings projections.
However, when I make a relative valuation with its industry key metrics, I see a rather overvalued stock. The stock has a forward price-earnings ratio of 327.9, a price-book ratio of 10.64 and a price-sales ratio of 24.54. The industry median values are 27.70 for forward price-earnings, 2.74 for price-book and 2.40 for price-sales.
It is hard to consider Snowflake attractive now. The potential is there, but the fundamentals do not inspire.
