While the near-term economic outlook seems uncertain, the current bear market is creating some eye-popping bargains for savvy long-term investors. One company that looks especially attractive during the market's indiscriminate sell-off is Snowflake (SNOW +2.10%), a provider of a cloud-based data platform. Snowflake is solving the crucial problem of organizing and analyzing large amounts of data for businesses so they can make informed decisions in a timely manner.
Snowflake's fast growth has grabbed investors' attention, but an equally important trend investors might be overlooking is how efficiently the company has been scaling its business. Let's take a closer look at how Snowflake's resilient business model can lead to an even brighter future for the company.
Snowflake is unleashing the power of data
Enterprises are generating oceans of new data every day. Snowflake simplifies the aggregation and analysis of these large volumes of data for businesses so they can gain key insights and plan better for the future. Snowflake's data cloud allows various departments in the company to share their data into one central repository, organize it logically, and make it easily accessible to anyone with appropriate permissions and controls. Analysts can run queries to get key performance metrics and assess the health of the business, and data scientists can perform advanced analytics and forecasting.
Image source: Getty Images.
Snowflake's cloud-agnostic data platform can be set up in any of the major cloud environments, such as Amazon Web Services or Alphabet's Google Cloud platform. Customers can also analyze and visualize the data by integrating tools of their choice with Snowflake's data cloud.
Besides that flexibility, Snowflake is also highly scalable. Customers don't have to worry about slowdowns in performance when they add more users -- the platform automatically assigns more computational resources instantaneously to support the increased workload.
Snowflake is solving an important and complex problem for modern-day businesses in a highly efficient manner.
Efficient execution, scalable business model, utterly overlooked
Customers are recognizing that Snowflake can be a game-changer for them and are eagerly adopting its data cloud. Snowflake's total customer count grew over sixfold from 948 at the end of fiscal 2019 (ending on April 30, 2019) to 5,944 at the end of fiscal 2022. And its net retention rate -- the measure of how much existing clients spent over the previous year -- has exceeded 168% each of the past four fiscal years. Even for a high-growth SaaS company, these are top-of-class numbers.
NYSE: SNOW
Key Data Points
Snowflake's revenue has grown impressively over the same period.
| Growth | Fiscal 2019 | Fiscal 2020 | Fiscal 2021 | Fiscal 2022 | CAGR |
|---|---|---|---|---|---|
| Revenue (millions) | $97 | $265 | $592 | $1,219 | 132% |
Data source: Company earnings releases. CAGR = compound annual growth rate.
Even more impressively, Snowflake has attained this growth while significantly improving its gross margins and operating margins. The company is not yet profitable on the basis of generally accepted accounting principles (GAAP), but it turned free cash flow positive in fiscal 2022.
| Profitability | Fiscal 2019 | Fiscal 2020 | Fiscal 2021 | Fiscal 2022 |
|---|---|---|---|---|
| Gross margin | 46.5% | 55.9% | 59% | 62.4% |
| Operating margin | -191.9% | -135.3% | -91.9% | -58.6% |
Data source: Company earnings releases.
Digging a little deeper, Snowflake's sales and marketing expenses relative to its revenue have decreased each of the past four fiscal years. In other words, every dollar spent on sales and marketing is producing higher revenue year over year. And Snowflake is also able to extend its lead by investing in innovation at a steady clip.
Data source: Snowflake. Charts by author.
Improving profitability while rapidly growing sales, and strong operating leverage generated from sales and marketing expenses, reflect the company's brilliant execution and resilient business model.
Headed in the right direction
Many high-growth tech companies in the early stages of their life have struggled to grow at a reasonable cost, and they're unable to show a clear path to profitability. This becomes an even bigger risk in the current environment -- a bear market in an economic slowdown and with rising interest rates, where raising new capital is difficult and expensive.
Snowflake has separated itself from the herd with its consistent march toward profitability. As of April 30, the company had a strong balance sheet with $3.8 billion in cash and short-term investments and no long-term debt.
Snowflake's high-quality platform, the value it creates for customers, and its execution discipline should give great confidence to its investors. And for those looking to add a promising young tech company to their portfolio, Snowflake definitely deserves consideration.
