Database developer Snowflake (SNOW) has been an incredible growth machine. But for Wall Street, this does not mean much nowadays. Investors have mostly shunned these types of stocks – it’s a classic rotation.
But Snowflake is still well above its IPO price of $120, which was set in September 2020. The shares are now trading at around $267 and the market capitalization is at almost $82 billion. The company is only about ten years old.
As for me, I’m bullish on the stock – and let’s see why.
Performance
The third quarter results for Snowflake were amazing. The revenues soared 110% to $334.4 million, which handily beat the consensus estimate of $305.6 million.
The company did post a loss of 51 cents a share. But it was a nice improvement compared to last year’s $1.02 per share loss. For the most part, Snowflake is getting leverage from its rapidly increasing top line.
A key to the growth is that Snowflake is getting substantial uptake from existing customers. There are 116 of them that have over $1 million in annual revenues.
There are also no signs of a slowdown in the growth ramp. Snowflake’s guidance for the current quarter is for a range of $345 million to $350 million. The Street forecast, on the other hand, was for $316 million.
Cloud Power
Two of the founders of Snowflake — Benoit Dageville and Thierry Cruanes — are former engineers at Oracle (ORCL). While there, they saw the limitations of relational databases. So when they launched Snowflake, they spent a couple years building a new platform from scratch. It was a native cloud architecture and was built to make it extremely easy for someone to spin-up a powerful data warehouse.
In the meantime, Snowflake has put together a proven senior management team. The CEO, Frank Slootman, had built two other hugely successful enterprise software companies – ServiceNow (NOW) and Data Domain — before coming on board in 2019.
Snowflake’s data cloud allows customers to engage in advanced analytics, artificial intelligence and machine learning. There are also various versions that are focused on industry verticals like retail, media, healthcare, and financial services.
It’s true that Snowflake has major competitors like Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL). Interestingly enough, these companies are also partners and rely heavily on the hosting revenues from Snowflake. It’s a delicate balancing act.
Besides, Snowflake has the advantage of a modern architecture that is highly scalable. The market opportunity is also enormous. The company estimates the market opportunity for global spending on its Cloud Data Platform at roughly $90 billion.
Wall Street’s Take
Turning to Wall Street, Snowflake stock comes in as a Moderate Buy. Out of 25 analyst ratings, there are 16 Buy, nine Hold, and no Sell ratings. The average Snowflake price target is $387.78, implying 44.9% upside potential.
Conclusion
The pandemic has boosted sales for Snowflake, as companies have had to accelerate their digital transformations. But this does not necessarily mean the growth will decelerate, going forward. If anything, Snowflake has been able to greatly expand its footprint. As customers continue to use the service, they usually expand their usage over time.
True, the recent sell-off in the markets has been rough. Part of this has been due to rising interest rates but also inflated valuations. When growth becomes interesting again, Snowflake will probably be at the top of the shopping list for investors.
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