Is Snowflake Stock A Buy Following Q3 Results?

SNOW: Snowflake logo
SNOW
Snowflake

Snowflake (NYSE:SNOW) posted a stronger-than-expected set of Q3 2023 results, as demand for its cloud data warehousing tools mostly held up, despite some economic headwinds and cooling growth for public cloud players such as Amazon’s AWS and Microsoft Azure. However, the company’s guidance for Q4 FY’23 was weaker than expected, with product revenue projected at between $535 million and $540 million, compared to a consensus of over $550 million.  While Q3 revenue grew by about 67% year over year to $557 million, adjusted operating margins rose to about 8% up from 3% in the year-ago period. The company also generated free cash flows, with cash flow margins standing at about 12%. Snowflake’s key metrics also remained relatively strong across the board, with net revenue retention standing at 165%, indicating that the company is able to expand business with its existing customers. Snowflake also continues to expand its customer base, with the total customer count rising from 5,416 in Q3 FY’22 to about 7,292 in Q3 FY’23.

However, we think that Snowflake stock looks attractive at current levels. The stock was down marginally in after-hours trading on Thursday and remains down by close to 55% year-to-date.  Snowflake is valued at about 25x FY’23 revenue and about 17x FY’24 revenue, which is well below the 50x plus multiples it traded at last year. Now, although these revenue multiples might appear high, particularly in a rising interest rate environment, Snowflake has a long growth runway and its execution thus far has been very steady. The company is likely to be a big 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 and also offers more flexibility.  The company is targeting $10 billion in annual revenue by FY’ 29 and it is possible that it could fare still better, considering 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 50% 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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 Returns Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 SNOW Return 8% -55% -45%
 S&P 500 Return 0% -14% 82%
 Trefis Multi-Strategy Portfolio 1% -17% 229%
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[1] Month-to-date and year-to-date as of 12/1/2022
[2] Cumulative total returns since the end of 2016

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