Snowflake is a cloud based data storage and analytics or data cloud company and offers data as a service. With its data cloud, users can store data and gain access to applications and solutions such as marketing analytics, product development and IT support. It allows companies to build or host data intensive applications without operational burden as it is instead hosted on Snowflake’s data cloud.
It counts investors such as Berkshire and Altimeter’s Brad Gerstner amongst its ranks and it’s also worth noting that Berkshire owns 6.1 million shares or nearly 2% in Snowflake.
However, it is not a Buffett stock per se as it has been widely speculated that either one or both of Buffett’s deputies were behind this investment instead of Buffett himself.
With a strong performance in 2Q performance, the stock was up 23%. It even maintained its share price the next day when the Nasdaq crashed by 4%, after Powell’s speech at Jackson Hole.
5 Reasons Behind Snowflake’s Rally
and whether its time to get back into tech stocks.
1) Snowflake’s strong financials and operational growth
- Product revenue of $466 million in the second quarter, representing 83% YoY growth
- Remaining performance obligations of $2.7 billion, representing 78% YoY growth
- 6,808 total customers, an increase of 864 customers YTD or 1,818 YoY
- Net revenue retention rate of 171%
- 246 customers with trailing 12-month product revenue greater than $1 million
- Improving product gross margin to 75%
In a period of cost inflation, Snowflake was able to expand its margin by nearly 6% YoY, driven by not only scale but also higher price points as products improved and with a larger pool of large enterprise/corporate customers. As the platform is priced based on consumption of resources, higher consumption leads to higher revenue and margins.
It is worth noting that net loss before tax margin has improved to -44% despite additional investments being made into sales, marketing, and R&D as Snowflake has gained significant operating scale over the previous quarters.
In current times where companies are managing headcount strenuously, companies such as Snowflakes who increase their headcount are viewed positively by investors.
2) World class retention rate
Although the net revenue retention (NRR) rate across SaaS companies tend to be above 100%, Snowflake is holds the number one spot in terms of NRR. Being able to maintain its high levels of NRR not only demonstrates its stickiness but also that its customers willingness to spend more.
Looking at the list of SaaS companies below with good net retention rate (Data as of 2Q21), it is clear that Snowflake is heads above other SaaS companies.
Companies with Good Net Retention Rate
| NRR below and equal to 100% | NRR above 100% |
|---|---|
| Hubspot (100%) | Snowflake (169%) |
| Surveymonkey (100%) | Twilio (155%) |
| Squarespace (85%) | Datadog (146%) |
| Slack (143%) | |
| Zoom (140%) | |
| Fastly (130%) | |
| Okta (123%) | |
| Qualtrics (122%) | |
| Pagerduty (122%) | |
| Asana (120%) | |
| Zendesk (112%) | |
| Shopify (110%) |
Despite being compared to SaaS companies, it is important to note that Snowflake is not operating as a SaaS model as 93% of its revenue is consumption based and in many cases, rollover of unused capacity may be permitted.
Although Snowflake primarily bills annually in advance, it only recognizes revenue as consumption occurs, unlike the SaaS revenue model which is associated with regular ongoing payments over a defined time period in exchange for the use of the software application.
3) Growth in customer commitments
Customer commitments or performance obligation represents the amount of contracted future revenue that has not yet been recognised. These are non cancellable contracted amounts and exclude on demand arrangements or additional billings arising from additional services.
With performance obligation of $2.716 billion and 57% or $1.548 billion expected to be recognised as revenue in the next 12 months, this shows that Snowflake already has a huge amount of revenue in the pipeline. Once new customers and customer growth are taken into account, Snowflake will have much more growth in the next 12 months.
4) Growth in large and strategic customers
Having large customers is valuable to the company from not only a stability and profit margin perspective but also a way of showing the markets the quality of its offering as it is respectable to be serving large well known customers.
A headline indicating total customers growth is positive but knowing that the number of large customers continue to increase shows that its sales team are doing well as they continue to gain large customers, potentially from other competitors.
Snowflake now services more than 25% of the Forbes Global 2000 customers. The Forbes Global 2000 is a list of the largest companies ranked by Sales, profit, assets and market value. Names on this list who are strategic customers of Snowflake include Accenture, Capgemini, Cognizant, IBM, Equifax and S&P Global.
5) Improved Guidance
Snowflake is one of the few companies that increased its guidance for the rest of the year.
In the previous quarter, Product revenue was guided to be at $1,893 million, Snowflake has increased it slightly to $1,910 million. The four metrics percentages have all increased between 0.5% to 1% as well.
So is Snowflake a buy?
Snowflake is widely compared to other product offerings by big tech companies such as Google Cloud, Amazon’s Web services and Oracle’s Database. Companies such as MongoDB and even Palantir’s commercial offering (known as Gotham) are also viewed as competitors. In this industry filled with strong competitors, Snowflake has proven its mettle with this blockbuster set of results and improved guidance. This is probably why Berkshire is invested in Snowflake.
We would be wary about investing in Snowflake as it is currently trading at a market capitalisation of $62 billion or a price to sales ratio of 32 times based on its latest guidance. Many would view this valuation as being priced to perfection.
Unless Snowflake can continue on its growth trajectory for a few more years and have a plan to turn its -44% loss margin into a profit margin in due course, we may see share prices come down should Snowflake start to stumble on its growth trajectory.
