Is Snowflake Stock A Buy After Solid Q2 Earnings?

SNOW: Snowflake logo
SNOW
Snowflake

Snowflake (NYSE:SNOW)  published a strong set of Q2 FY’23 results and raised its guidance for the full year, as demand for cloud data warehousing solutions soared despite mounting economic headwinds and mixed earnings reports from many other SaaS players. Snowflake’s revenue handily beat estimates, rising 83% year-over-year to $497 million, while adjusted operating margins came in at 4%, compared to the company’s forecast of -2%. The company also generated free cash flows, with cash flow margins standing at about 12%. Snowflake’s key metrics also remained strong across the board, with net revenue retention standing at 171%, indicating that the company is able to expand business with its existing customers. Snowflake’s remaining performance obligations, which is an estimate of future business, stood at $2.7 billion, up 78% versus last year.  Snowflake also continues to expand its customer base, with total customers rising from 4,990 in Q2 FY’22 to about  6,800 in Q2 FY’23. Snowflake raised its revenue guidance marginally,  projecting product revenue of between $1.90 billion and $1.915 billion, up between 67% and 68% year-over-year.

Snowflake stock rallied by close to 17% in after-hours trading following the earnings report, trading at about $188. However, we still think that the stock looks like a decent value at the current market price. Even after Wednesday’s rally, Snowflake is valued at about 29x FY’23 revenue and about 20x FY’24, which is well below the 50x plus multiples it traded at last year. The company is likely to be a prime beneficiary of the continued pivot from on-premise databases to cloud-based warehousing solutions. Snowflake is particularly well-positioned in this market, as its product works across cloud platforms such as Amazon’s AWS, Google Cloud, and Azure, and also offers more flexibility, as it separates storage from computing for the purpose of billing.  The company is targeting $10 billion in annual revenue by FY’ 29 and it is possible that it could fare still better, considering its strong recent execution and its growing addressable market (about $248 billion) as it focuses on new workloads such as cybersecurity. We value Snowflake stock at about $220 per share, about 18% ahead of the after-hours price of $188. See our analysis  Snowflake Valuation: Is SNOW Stock Expensive Or Cheap? for more details. See our analysis of Snowflake Revenue for more details on Snowflake’s business model and how its revenues are expected to trend.

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Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 SNOW Return 6% -53% -43%
 S&P 500 Return 0% -13% 85%
 Trefis Multi-Strategy Portfolio -1% -14% 241%

[1] Month-to-date and year-to-date as of 8/25/2022
[2] Cumulative total returns since the end of 2016

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