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Can Snowflake Grow Into Its Valuation?

By Evan Niu, CFA – Sep 18, 2020 at 11:00AM

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As if the stock weren't expensive enough at the offering price.

Cloud-based data warehousing specialist Snowflake made history this week with the largest software IPO ever. The offering enjoyed extreme demand from investors, potentially due to the fact that Warren Buffett's Berkshire Hathaway made the rare move of investing in a tech IPO via a concurrent private placement.

Snowflake was already boasting incredibly lofty valuation multiples based on the offering price ($120) alone. With shares more than doubling on the first day of trading, growth expectations are now in the stratosphere. Can Snowflake live up to those hopes?

Man wearing a suit and holding a tablet that is projecting a graph from its screen

Image source: Getty Images.

In a valuation league of its own

Like most IPOs, Snowflake shares will be extremely volatile as the market attempts price discovery, so I'll be going off the first day's close. At the first day's closing price of nearly $254, Snowflake was boasting an astounding market cap of $70 billion. For perspective, that's over 5.5 times the $12.4 billion valuation that the company fetched in a Series G funding round in February -- just seven months ago.

At $70 billion, Snowflake is trading at nearly 174 times trailing-12-month (TTM) sales of $402.7 million. The offering price represented a price-to-sales ratio of 82.4. Let's compare that valuation multiple with some other high-flying enterprise tech stocks.

Company

TTM Revenue

P/S Ratio

Snowflake (SNOW -0.22%)

$402.7 million

173.8

Zoom Video (ZM -1.18%)

$1.35 billion

83.8

MongoDB (MDB 1.92%)

$501.6 million

24

Fastly (FSLY 2.00%)

$246.3 million

35.2

CrowdStrike (CRWD -0.54%)

$654.3 million

41.7

Okta (OKTA 0.12%)

$703.7 million

34.6

Zscaler (ZS -0.92%)

$431.3 million

39.8

Data source: Yahoo! Finance and author's calculations.

If you thought Zoom was expensive (and it is), Snowflake is in a whole other league. Most of these peer companies have somewhat comparable top lines but trade at a fraction of Snowflake's sales multiple. Still, credit where it's due: Many of Snowflake's growth metrics are undeniably impressive.

The company's net revenue retention rate of 158% leaves its peers in the dust, remaining performance obligation (RPO) more than tripled to $688.2 million in the first half of this fiscal year, and customers spending more than $1 million annually has more than doubled to 56. Snowflake is also growing faster than most of these comparable companies, save for Zoom, which saw revenue skyrocket by 355% last quarter.

Spending money to make money

However, Snowflake has been spending extravagantly to generate that growth, with sales and marketing expenses exceeding revenue for most of the past two years.

Chart comparing Snowflake's revenue to its sales and marketing spending

Data source: Prospectus. Chart by author. Fiscal quarters shown.

It's common for enterprise software companies to have high sales costs as a percentage of revenue since sales cycles are long and complex -- 40% to 50% is not unheard of -- but topping 100% of revenue is notable.

Company

Revenue Growth (MRQ)

Sales and Marketing as a Percentage of Revenue (MRQ)

Snowflake

121%

70%

Zoom

355%

24%

MongoDB

39%

54%

Fastly

62%

33%

CrowdStrike

84%

48%

Okta

43%

49%

Zscaler

46%

71%

Data source: SEC filings. MRQ = most recent quarter.

It's encouraging that Snowflake is starting to pull back on sales and marketing while still being able to post enviable growth and revenue retention metrics. CEO Frank Slootman told CNBC this week that it's not just another tech company that will pursue growth at all costs. The $70 billion question will be whether Snowflake can maintain those growth rates in the quarters ahead while keeping costs in check.

If not, the company might have a hard time justifying its valuation to investors.

Evan Niu, CFA owns shares of Okta. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), CrowdStrike Holdings, Inc., Fastly, MongoDB, Okta, Zoom Video Communications, and Zscaler and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool recommends Snowflake. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Snowflake Inc. Stock Quote
Snowflake Inc.
SNOW
$169.96 (-0.22%) $0.38
Okta Stock Quote
Okta
OKTA
$56.87 (0.12%) $0.07
MongoDB Stock Quote
MongoDB
MDB
$198.56 (1.92%) $3.74
Zscaler Stock Quote
Zscaler
ZS
$164.37 (-0.92%) $-1.52
Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$73.59 (-1.18%) $0.88
Fastly, Inc. Stock Quote
Fastly, Inc.
FSLY
$9.16 (2.00%) $0.18
CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
CRWD
$164.81 (-0.54%) $0.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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