Snowflake (NYSE:SNOW) went public in the biggest software IPO ever last month, raising $3.4 billion and more than doubling on its first trading day. The cloud-based data storage and analytics company dazzled the bulls with its triple-digit revenue growth, sticky net retention rate, and disruptive approach to breaking down data silos across large organizations.
Warren Buffett's Berkshire Hathaway and Salesforce (NYSE:CRM) invested in Snowflake, amplifying that bullish sentiment, and retail investors flocked to the stock. However, that rally boosted Snowflake's trailing 12-month price-to-sales ratio to nearly 170 -- making it one of the priciest tech stocks on the market.
Instead of chasing Snowflake at these frothy levels, I believe investors should simply buy Salesforce, which also offers exposure to the growing cloud computing market while providing a much wider safety net.
How are Snowflake and Salesforce different?
Snowflake and Salesforce both provide cloud-based SaaS (software as a service) solutions for enterprise customers.
Snowflake's platform gathers and analyzes data across a company's various computing platforms, and centralizes the results, which can then be fed to a data visualization platform like Salesforce's Tableau.
Breaking down those data silos can streamline a business by getting everyone on the same page, and the cloud-based platform is easy to scale as an organization grows. Snowflake served 3,117 customers at the end of July, including 146 of the Fortune 500 companies.
Salesforce's flagship CRM (customer relationship management) platform helps companies manage customer relationships over the cloud. It's been the world's largest CRM software provider over the past seven years, according to IDC, and it ended last year with a market share of 18.4%.
Salesforce also offers other cloud-based e-commerce, marketing, and analytics services. All these services help over 150,000 companies streamline their operations, automate certain tasks, and reduce their overall dependence on human employees.
Comparing the fundamentals
Snowflake's revenue surged 174% to $264.7 million in fiscal 2020, and rose another 133% year-over-year to $242 million in the first half half of fiscal 2021.
Those growth rates are astounding, but Snowflake is deeply unprofitable: Its net loss widened from $178 million to $348.5 million in 2020, and only narrowed slightly from $177.2 million to $171.3 million in the first half of 2021.
Salesforce's revenue grew 29% to $17.1 billion in fiscal 2020, and rose 30% to $10 billion in the first half of 2021, even as the pandemic disrupted many businesses worldwide.
Its net income declined 89% to $126 million last year, partly due to its $15.7 billion takeover of Tableau, but surged nearly six-fold year-over-year to $2.7 billion in the first half of 2020.
On a non-GAAP basis, which excludes one-time charges, stock-based compensation, and other variable expenses, Salesforce's earnings grew 9% last year and 35% in the first half of 2020. Its non-GAAP operating margin also hit a record high of 20.2% in its second quarter.
Snowflake hasn't offered any guidance for the rest of the year, but it will likely more than double its revenue this year and remain unprofitable. Salesforce expects its revenue to rise 21%-22% and for its non-GAAP EPS to grow 24%-25% for the full year.
Why is Salesforce a better investment?
Snowflake is generating much stronger revenue growth than Salesforce, but its growth is decelerating and it lacks a clear path toward profitability. Salesforce is still generating impressive growth for a 21-year-old company, and it should remain consistently profitable for the foreseeable future.
Snowflake also faces more direct competition from rivals like Amazon's AWS Redshift and Microsoft's Azure SQL Data Warehouse, while Salesforce retains a commanding lead in the CRM market.
But above all else, Salesforce's valuation makes sense relative to its growth. The stock trades at 70 times forward earnings and 11 times next year's sales, which makes it significantly cheaper than many of other cloud stocks. Even if Snowflake grows its revenue 130% to $610 million in fiscal 2021, the stock would still be trading at over 110 times that estimate.
I still admire Snowflake's core business, but I'm not willing to pay the wrong price for a good company. Salesforce, however, is a great company that can still be bought at a reasonable price.