As the world becomes increasingly digital, companies are collecting and storing more and more data. Cloud-based data platform company Snowflake (SNOW -2.70%) went public in September 2020 to much fanfare and at a lofty valuation. Often with IPOs, the hype exceeds the reality, but here are three reasons why Snowflake has what it takes to justify its share price and send it even higher.
1. The world is full of data and creating more
Think about every digital action you take each day. Every email sent, e-commerce site visited, digital payment made, social media update posted, or YouTube video streamed leaves behind data that is collected and stored by companies. Many of these social media platforms, connected devices, and technologies weren't around until recently -- consider that the first iPhone didn't come out until 2007.
As more people worldwide become connected and more aspects of our lives are taken online, the amount of digital data created is rapidly increasing. It's estimated that roughly 90% of the world's collected data is from just the past five years, and it's forecast that the total volume of data will increase by 51% by 2025.
With the quantities of data they have stored growing so quickly, companies can often struggle to manage it. The data often ends up in dated, isolated forms of storage where it's difficult to use.
Image source: Getty Images
2. Snowflake is powering the "data economy"
Snowflake's platform gives customers the tools to store, organize, and analyze data. It's built in the cloud and works with many third-party applications, making it easy to use with little to no hardware, program installs, or maintenance needed on the client's end.
Snowflake generates revenue from a usage-based model, meaning its customers only pay for what they need. Data doesn't "expire" or get "used up"; instead, as more data is created over time, more is stored, giving Snowflake the ability to grow with its customers as more capacity is required.
Snowflake's business goes beyond serving individual customers in isolation. It's creating a data economy in which organizations on its platform can share data, as well as access hundreds of ready-to-use data sources from more than 140 third-party providers.
An advertising company on the marketplace could access demographic data to help it make better ad-spend decisions. A public organization could use pools of public health data on the marketplace to inform its responses to crises. As Snowflake's platform wins more customers, its expanding marketplace becomes even more useful for everyone involved -- a powerful network effect.
3. Fantastic financials
The overall growth of data volume, a usage-based model, and expanding services have contributed to Snowflake's significant growth. Revenue in its fiscal 2021, which ended Jan. 31, 2021, grew 124% year over year, and management's guidance calls for 86% revenue growth in fiscal 2022.
Snowflake has been quickly picking up clients among the Fortune 500. Its customer count among that elite group of corporate giants has nearly tripled to 187 over the past two years. Customers are also spending 68% more each year on average after coming aboard.
Snowflake isn't yet profitable -- it posted a $539 million net loss this past year. However, it is investing heavily in its growth and is on a path toward profitability. Management expects the business to break even on a free-cash-flow basis this fiscal year, and gross margins have improved from 58% in fiscal 2019 to what is expected to be 72% this year.
Snowflake's long-term growth strategy is based on its playbook of attracting large business customers and getting them to spend more with the service over time. At the company's 2021 investor's day, management unveiled its goal of growing revenue from $554 million in fiscal 2021 to $10 billion in fiscal 2029.
To hit that benchmark, Snowflake is aiming to expand the number of its customers spending $1 million or more annually on the platform from 77 to 1,400 in the intervening years. Investors will want to monitor how well Snowflake stays on track toward that target.
Here's the bottom line
Snowflake came public with a ton of hype, and even after a pullback of more than 30% from its high, the stock still trades at a price-to-sales (P/S) ratio of 97, among the loftiest valuations in the stock market. Given its market cap of $79 billion, investors clearly expect big things from the company. Any signs of slowing growth could reverse investor sentiment about it in a hurry.
Still, the hype is in many ways warranted. The company brings a unique business model to the rapidly growing big data industry, just as more companies are beginning to recognize its importance. Snowflake's steep valuation makes it a riskier stock to hold in the short term, but the potential long-term upside for investors is obvious.
