Snowflake (SNOW 0.39%) has been a divisive stock ever since its initial public offering in September 2020. Bulls praised the cloud-based data warehousing company's breakneck revenue growth, but bears balked at its steep valuation.
The bulls initially stayed in charge. Snowflake's stock opened at $245 on the first day, more than double its IPO price of $120, and eventually rallied to an all-time high of $401.89 in November 2021. However, concerns about its slowing growth and rising interest rates subsequently brought the bears back, and its stock now trades at about $144.
With an enterprise value of $41.5 billion, Snowflake still isn't cheap at 14 times this year's sales. I recently argued that this frothy valuation would limit its near-term gains in this choppy market. But today, I'll discuss three other aspects of Snowflake that smart investors should also know: its competitive advantages, its long-term goals, and its unexpected buyback plans.
Image source: Getty Images.
1. Snowflake's greatest strength is its flexibility
Snowflake's cloud-based data warehousing platform stores data from a wide range of applications so it can be easily accessed by third-party software. That approach breaks down silos across large companies, ensures everyone is on the same page, and makes it easier to make data-driven business decisions.
Snowflake isn't the only data warehousing platform in town. The three largest public cloud infrastructure platforms -- Amazon Web Services (AWS), Microsoft Azure, and Alphabet's Google Cloud Platform (GCP) -- all bundle data warehousing services into their ecosystems. Snowflake doesn't operate its own cloud infrastructure platform, so its data warehouse actually runs on AWS, Azure, and GCP.
The bears argue that the trio of tech titans can eventually drive Snowflake out of the market with aggressive bundling strategies. They also believe it's ironic that Snowflake pays recurring cloud infrastructure fees to its three largest competitors -- and that those cloud giants could potentially hike their hosting prices to melt Snowflake's business.
Those arguments are compelling, but they overlook the main reason Snowflake increased its number of customers from 4,139 at the end of fiscal 2021 to 7,828 at the end of fiscal 2023 (which ended this January): the flexibility of its platform.
Snowflake doesn't lock its customers into a single cloud ecosystem or sticky subscriptions. Instead, it's compatible with a wide range of public cloud platforms and operates a usage-based model -- which only charges companies for the storage and computing power they actually use -- instead of recurring subscriptions. Snowflake also allows its customers to access its storage and computing features separately. That flexibility gives it an edge against its larger competitors.
2. It's aiming for $10 billion in product revenue
During its investor day last June, Snowflake said it could generate $10 billion in product revenue by fiscal 2029. That would represent a compound annual growth rate (CAGR) of 32% from its $1.9 billion in product revenue in fiscal 2023.
Snowflake says it can achieve that five-fold increase by gaining larger customers that generate at least $1 million in trailing-12-month product revenue. That high-value cohort already grew from 77 customers at the end of fiscal 2021 to 330 at the end of fiscal 2023, and the company expects it to expand to about 1,400 customers by the end of fiscal 2029. Snowflake sees that growth being driven by the secular expansion of the cloud, analytics, and AI markets.
3. It just authorized a $2 billion buyback plan
Snowflake is still unprofitable by generally accepted accounting principles (GAAP) measures. Its net loss widened from $680 million in fiscal 2022 to $797 million in fiscal 2023, and analysts anticipate an even wider loss of $898 million this year.
That's why it was a bit surprising when Snowflake authorized a $2 billion buyback plan at the end of fiscal 2023, lasting through March 2025. The company isn't obligated to buy back all of those shares, but it's an odd decision because it's still racking up steep losses and ended fiscal 2023 with just $940 million in cash and equivalents.
Instead of narrowing its net losses per share, those buybacks are likely aimed at offsetting stock-based compensation, which gobbled up 42% of its revenue in fiscal 2023. But unlike other tech companies, Snowflake didn't pair those buybacks with layoffs. Instead, it plans to hire more than a thousand new employees in fiscal 2024 as it continues to expand.
Is Snowflake a safe stock to buy right now?
Snowflake could still generate multi-bagger gains over the next few years if it achieves its goal of generating $10 billion in product revenue by fiscal 2029. But a lot of that long-term growth has already been baked into the stock's valuation, and a failure to clear that high bar could cause its shares to plummet.
Snowflake might be worth nibbling on as a speculative play at these levels, but investors shouldn't be too surprised if it gets cut in half again during an ugly market downturn.
