Snowflake’s Growth Is Slowing. Is The Stock Still Attractive?

Snowflake (NYSE:SNOW) posted a stronger-than-expected set of Q4 FY’23 results, as demand for its cloud data warehousing tools largely held up, despite economic headwinds and cooling growth for major public cloud players such as Amazon’s AWS and Microsoft Azure. While Q4 revenue stood at $589 million, marking a 53% year-over-year growth, adjusted operating margins rose to 6%, up from 5% in the year-ago period. Snowflake’s cash generation also continues to improve, with free cash flow margins growing to 35%, up from 18% a year ago. Snowflake’s key metrics also remained relatively strong across the board, with net revenue retention standing at 158%, indicating that the company continues to expand business with its existing customers. Snowflake is also expanding its customer base, with the total customer count rising from 7,292 in Q3 FY’23 to 7,828 in Q4.

However, the company’s guidance for FY’24 was weaker than expected. Product revenues are projected to grow by 40% to $2.7 billion, marking a slowdown from the 70% growth levels seen through FY’23.  Margins are also unlikely to see a very significant improvement, with adjusted operating margins projected at about 6% and adjusted free cash flow margins standing at 25%. Snowflake’s rising share count is also a concern. Management expects to have a weighted average of 363 million diluted shares in fiscal 2024 compared to an average of less than 319 million in fiscal 2023, due to the company’s heavy use of stock-based compensation. Although Snowflake has authorized share repurchases to the tune of $2 billion over the next two years to partly offset this, there will still be an overall dilutive effect for shareholders, with the company’s cash position also likely to be impacted to some extent.

So is Snowflake stock a buy at current levels of around $142 per share? At current levels, Snowflake is valued at about 16x projected FY’24 revenue and about 12x FY’25 revenue, which is well below the 50x plus multiples it traded at back at its peak in 2021. Now, although these revenue multiples might still appear high, given Snowflake’s slowing growth in a rising interest rate environment, the company still has a long growth runway and its execution thus far has been pretty solid. Snowflake 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 has just reiterated its long-term target of $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 $180 per share, about 25% 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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