Snowflake (SNOW) is a cloud computing data warehousing company stock, I will not go in-depth into what Snowflake (SNOW) does in this article, but would analyse their latest earnings results instead.
For the uninitiated, here’s a summary of their business as taken from their S-1 filling:
“Our platform unifies data and supports a growing variety of use cases, including data warehousing, data lakes, data engineering, data science, data application development, and data sharing. Customers can leverage our platform for any one of these use cases, but when taken together, it provides an integrated, end-to-end solution that delivers greater insights, faster data transformations, and improved data sharing. Delivered as a service, our platform is deployed across multiple public clouds and regions, is easy to use, and requires near-zero maintenance.”
Run by an all-Star management, CEO Frank Slootman and CFO Mike Scarpelli have a track record of scaling companies from millions to billions in revenues.
Snowflake’s strong revenue growth
Snowflake reported revenue of $383.8 million in the fourth quarter FY 2022 on 2nd Mar 2022, representing 101% year-over-year growth. This is their strongest quarter revenue to date. Product revenue surpassed $1.1 billion for the full year, growing 106% year-over-year. The remaining performance obligations were $2.6 billion, representing year-on-year growth of 99%. They reported fantastic results at revenues above $1 billion.
No other public listed company currently comes close to their growth rate at scale.
Overshadowed by lacklustre guidance
As per the guidance for the first quarter of FY 2023, SNOW expects product revenues between $385 million and $388 million, representing year-over-year growth between 79% and 81%. They do not provide guidance for total revenues which includes professional services and other revenues. For the full FY 2023, they expect product revenue between $1.88 billion and $1.9 billion, representing year-over-year growth between 65% and 67%.
The market was not satisfied with their guidance and punished the stock by dropping 20% post-market:
Their FY 2023 guidance was disappointing at best, representing a significant slow down in growth rate. Investors are forward looking and are expecting revenue guidance of above 80% growth rate.
However, the management is most likely being conservative like they always are and gave a lowball figure for an easy guidance beat next round. There will also be enough room for raising revenue guidance in the future.
Snowflake’s Operating cashflow: Finally profitable
I prefer to look at Operating Cash Flow instead of the adjusted figure they provide in the investor presentation. Very often, management hide their actual financial performance with too many adjustments in those colourful investor presentations.
I would rather they give me the raw figures which can be found in their financial statements.
In the above financial table, Operating Cash Flow is $110 million. It shows that their operations are no longer burning cash and they are profitable as compared to one year ago. Taking maintenance and growth capital expenditures of purchasing property and equipment and software development costs into account, their Operating Free Cash Flow is still positive at $81 million.
I have excluded the “net cash paid on payroll tax-related items on employee stock transactions” because these are actual cash outflow from their business. Taxes are an expense; I will not adjust for that.
For the discerning investor, the figure to look at for Free Cash Flow Margin is the non-adjusted one at 7% (see table above).
One year ago the management guided 82% product revenue growth at the midpoint (FY 2022 Guidance). Fast forward to today, actual product revenue growth was 106%, that is a huge beat in guidance, which is a difference of $120 million in revenue. This shows how conservative the management is in providing guidance.
Projecting revenues for the year is challenging. Investors demand that the management can foresee the future, and this is an unrealistic expectation; you will only get conservative figures which are likely to disappoint.
In a situation like this, the market sometimes present good opportunities for the bargain hunter.
Snowflake is a Berkshire Hathaway investment
Many would be surprised by Warren Buffett’s move to buy SNOW (which at that point in time is a loss-making company).
Buying SNOW was not Buffett’s decision. It was later revealed that Todd Combs made the investment decision after experiencing SNOW’s platform offerings as a customer. Todd Combs is currently the CEO of GEICO and he is frequently cited as a potential successor of Buffett as the next Chief Investment Officer of Berkshire.
In total, Berkshire owns about 6.1 million shares of SNOW at a cost price of $120 per share, their total investment cost is $734.8 million.
SNOW is trading at a reasonable valuation
| IPO ($120) | IPO market open ($245) | Today ($180) | |
| Market Cap ($B) | $33.3 | $68 | $54.3 |
| Revenue ($B), Quarterly x4 | $0.532 | $0.532 | $1.535 |
| Price/Sale | 62.6x | 127.8x | 35.4x |
SNOW at IPO (on 16 Sep 2020) was trading at a Price to Sales of 62.6x, which was at fair value considering that they were growing at above 100%. After being listed, it went up to above 100x P/S at ridiculous levels which was most probably priced to perfection for the next 3 years.
Latest events like the Fed rate hikes, fear of inflation and the Russia-Ukraine conflict has brought hypergrowth stocks back down to pre-COVID level valuation. I’m not concerned about macroeconomics or geopolitical factors affecting stock prices. The investor should focus on the business fundamentals and the valuation you are paying for the business in the long term.
At the point of writing, SNOW trades at about $180-$200 which presents a fairer multiple for investors, if SNOW can maintain growth rates at above 50-60% for the next few years.
If you’re looking to own strong hypergrowth stocks at a discount, I share how I continue to grow and invest in hypergrowth stocks, even in today’s markets. Join me at my next webinar.
Disclaimer: I’m long SNOW.
