Does Snowflake Stock Justify Its Lofty Valuation In A Rising Rate Environment?

Snowflake stock (NYSE:SNOW) has held up relatively well through the tech sell-off over the last month, rising by about 8% since early September, compared to the Nasdaq-100 which remains down by about 4% over the same period. The technology space has seen a sell-off, amid concerns about the U.S. economy, with GDP contracting over the last two quarters and the Fed continuing with its aggressive rate hikes as it looks to rein in inflation. However, Snowflake’s underlying performance has actually been pretty strong in the face of these headwinds as demand for its cloud data warehousing solutions has held up. The company’s Q2 FY’23 results were better than expected with sales growing by 83% year-over-year to $497 million and operating margins coming in positive, versus a forecast loss. Snowflake also 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. Wall Street has also been largely positive on the stock, with most new coverage initiations coming with a buy rating.

Although Snowflake stock has declined by close to 46% year-to-date and by almost 55% from all-time highs, trading at about $183 per share, the company’s forward price-to-sales multiple still stands at nearly 29x, compared to the broader S&P 500 which trades at under 2.5x sales.  This appears to be a lofty multiple in the current rising interest rate environment, with the benchmark federal funds rate now standing at over 3%, from just about 0.25% at the beginning of this year. However, the markets are likely betting that Snowflake will grow into this valuation quickly, given its large addressable market and its expanding margins. Snowflake is likely to be a prime beneficiary of the ongoing pivot from on-premise databases to cloud-based warehousing solutions. Snowflake is 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 $210 per share, about 15% ahead of the current market price. 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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