Think of Snowflake stock as a proxy on the torrid growth of cloud computing giants Amazon.com (AMZN), Microsoft (MSFT) and Alphabet‘s (GOOGL) Google.
Many companies are turning to cloud computing services as part of “digital transformation” projects that aim to gain business insights from crunching massive volumes of data. The cloud computing titans offer their own data analytics and management tools. They’re both partners and rivals of SNOW stock.
In a “coopetition” model, the cloud giants give their customers a green light to buy Snowflake‘s (SNOW) software. The reason is Snowflake’s tools are better at some key tasks, such as letting companies compile, view, analyze and share massive amounts of data in an easy way.
Nearly two-fifths of Fortune 500 companies use Snowflake’s software in the cloud as they move away from on-premise data warehousing products from Teradata (TDC), Oracle (ORCL) and IBM (IBM). One Snowflake customer is pharma giant Pfizer (PFE). Pfizer uses Snowflake tools to forecast product sales and to gain insights into the distribution of the Covid-19 vaccine.
Stellar customer growth enabled SNOW stock to pull off the largest initial public offering ever by a software company in September. The IPO raised $3.4 billion.
But is Snowflake a buy right now?
Snowflake Stock: Roadmap to $10 Billion In Revenue
Snowflake stock hit an all-time high of 429 in early December. But SNOW stock swooned amid analyst concerns over its lofty valuation. Snowflake stock has retreated some 45% from its all-time high. Not many stocks rebound from that steep of a correction.
At a June 10 analyst day, Snowflake laid out a path to $10 billion in product revenue by fiscal 2029, which coincides with calendar 2028. The $10 billion revenue target would result in a compound annual growth rate of 44%.
The company said it expects to increase the number of customers with over $1 million in product revenue. Snowflake also guided to long-term operating margin of 10%-plus, lower than some analysts expected.
Whether Amazon Web Services ratchets up competition remains a concern for SNOW stock. Plus, competition with privately held Databricks is heating up. A February funding round valued Databricks at $28 billion.
Databricks, which uses artificial intelligence, is expected to launch its own IPO.
But Snowflake stock bulls point to its seasoned management team as a strength no matter what unfolds.
Two former Oracle engineers — Benoit Dageville and Thierry Cruanes — along with Marcin Zukowski, former chief executive of startup Vectorwise, started Snowflake in 2012. The company holds patents in database architecture, data warehouses and other areas.
SNOW Stock: ServiceNow Veterans Lead Company
Snowflake brought in Frank Slootman as chief executive in May 2019. Slootman had stepped down as CEO of ServiceNow in early 2017. Former ServiceNow Chief Financial Officer Mike Scarpelli in 2019 also joined Snowflake in the same CFO position.
Unlike legacy, on-premise data management systems, Snowflake’s platform was built from the ground up for cloud computing. It provides 100% of its software over the internet.
Snowflake customers can share data with their partners across multiple online storage systems using the company’s data warehouse. Snowflake also enables easily searchable data to be shared among applications.
Snowflake’s data analytics tools became available on Amazon Web Services in 2015, Microsoft’s Azure in 2018 and on Google’s cloud platform in 2020.
In June, Snowflake partnered with C3.ai (AI). The two companies will cooperate in offering artificial intelligence tools to companies.
Amazon Web Services A ‘Frenemy’
“While Snowflake is multi-cloud, it derives some 85% of its revenues from data analytics jobs deployed on Amazon Web Services, which is also Snowflake’s biggest rival with AWS Redshift,” UBS analyst Karl Keirstead said in a recent note to clients.
“This ‘frenemy’ relationship is critical to Snowflake’s success,” Keirstead went on to say. “AWS benefits far more from Snowflake spending on compute and storage infrastructure resources than they lose in the form of foregone AWS Redshift revenues. Snowflake represents a dream customer and partner for AWS and Microsoft Azure.”
Snowflake has focused on six core markets, including financial services, health care and life sciences, retail and consumer packaged goods, advertising media and entertainment, technology, and the government sector.
When Snowflake went public in September it used a dual-class share structure that gave its CEO and insiders super-voting rights. However, Snowflake eliminated the dual-class structure in March.
Snowflake had been based in San Mateo, Calif. Amid the shift to remote work spurred by the coronavirus emergency, Snowflake in May said it no longer has a corporate headquarters. It designated Bozeman, Mont., as its principal executive office. Slootman and Scarpelli are based in Bozeman.
Snowflake Stock Fundamental Analysis
Software stocks typically trade as a multiple of forward-looking revenue growth. Software-as-a-service, or SaaS, companies, such as Salesforce.com (CRM), typically provide the highest revenue growth. Salesforce is a key marketing partner of SNOW stock.
Snowflake also partners with consulting firms such as Deloitte and information technology firms such as privately held Informatica.
Snowflake is not an SaaS company, however. Instead, it uses a consumption-based business model based on how much data its customers crunch and store.
Snowflake’s revenue growth stands out. First-quarter sales jumped 110% to $228.9 million. But there’s less transparency and predictability than with subscription-based, recurring-revenue SaaS business models, analysts say.
“SNOW has a consumption model, whereby customers contract for a certain amount of compute and storage capacity,” Mizuho Securities analyst Gregg Moskowitz said in a note. “The company only records revenue, however, as that capacity is used, so there can be a lag of several months or more before revenue recognition begins.”
Snowflake is nearing an annual revenue run-rate of $1 billion. That’s a big milestone for software growth companies. But SNOW stock is unprofitable on the two most common accounting standards.
Many software companies are unprofitable using GAAP earnings, or generally accepted accounting principles, which includes stock-based compensation. But they’re profitable on a non-GAAP or “adjusted” earnings basis.
SNOW Stock Operates In The Red
In the first quarter, Snowflake reported a GAAP operating loss of $205.6 million and a GAAP per-share loss of 70 cents. Snowflake stock subsequently fell. It recorded an adjusted operating loss of $35.8 million.
Snowflake doesn’t break out adjusted earnings. Analysts estimate it lost 11 cents on an adjusted basis in the first quarter.
Snowflake operates in the red amid sizable investments, analysts say. For fiscal 2022, for example, Snowflake has told analysts it plans to hire 1,200 net new employees, which would represent 48% growth in head count.
Still, investments are paying off in revenue growth. Snowflake had 4,532 customers as of April 30, up 67% from the year-earlier period. That includes 187 of the Fortune 500. In the April quarter, Snowflake added a record 27 customers with more than $1 million per year in product revenue, giving it 104 such customers overall.
Goldman Sachs analyst Kash Rangan is bullish on Snowflake’s potential to dominate in cloud-based data analytics and management.
“We believe Snowflake will continue to replace incumbent warehousing solutions owing to their scalable and elastic cloud native data platform while also capitalizing on net new workloads and use cases as digital transformation drives greater digitization within the enterprise, and business intelligence and analytics remains a top priority for spending,” he said in a note.
SNOW Stock Technical Analysis
Snowflake stock went public on Sept. 16 at 120 a share. At the time, software growth stocks were hot as investors sought recurring revenue amid the coronavirus emergency.
SNOW stock popped as high as 319 on the first day of trading and closed 111.6% above the IPO price at 253.93. Shares pulled back as analysts debated Snowflake’s valuation.
Snowflake stock forged a cup-with-handle base over the next two months. The new base created an entry point of 301. SNOW stock blew past the buy point, hitting an all-time high of 429 on Dec. 8.
Snowflake stock swooned in late 2020 amid questions over its valuation even as the IBD Computer-Software Enterprise group stayed resilient. The Computer-Software Enterprise group did not break down until mid-February amid a market rotation to value.
Snowflake stock hit a low of 184.71 on May 13.
Canaccord Genuity analyst David Hynes said in a note that one question for investors is whether SNOW stock will trade in concert with software growth stocks. Software growth stocks have sold off on worries over inflation and rising interest rates. But Snowflake’s long-term financial outlook at the June 10 analysts day could set the stage for a rally.
Is Snowflake Stock A Buy Right Now?
Snowflake stock still trades at a substantial premium as a multiple of forward-looking revenue growth. SNOW stock holds an IBD Composite Rating of only 26 out of a best possible 99, according to IBD Stock Checkup.
IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
One plus is that Snowflake stock owns an Accumulation/Distribution Rating of B-plus, according to IBD MarketSmith analysis. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
SNOW stock has yet to form a base with a proper entry point. Snowflake stock has clawed above its 50-day moving average. If it holds above the 50-day line that could kick-start the right side of a deep base.
As of July 9, Snowflake stock is not a buy.
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Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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