Snowflake (SNOW -1.29%) and Cloudflare (NET -3.00%) are both hypergrowth tech stocks that reached their all-time highs in November 2021. But today, Snowflake and Cloudflare trade about 60% and 70%, respectively, below those record levels.
The bulls retreated from both hot stocks as their growth cooled off, the macro headwinds intensified, and rising interest rates popped their bubbly valuations. But should investors buy either out-of-favor stock as a turnaround play right now?
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The differences between Snowflake and Cloudflare
Snowflake and Cloudflare both provide cloud-based services, but they serve completely different markets. Snowflake aggregates a wide range of data from different computing platforms across a large organization, then stores all of that information in a centralized cloud-based data warehouse where it can be easily accessed by third-party analytics applications. That silo-busting approach makes it much easier for companies to make data-driven decisions.
Cloudflare's cloud-based content delivery network (CDN) accelerates the delivery of digital content on websites. It does that by storing cached copies of a website's photos, videos, and other digital media on "edge" servers, which are located physically closer to its visitors than the "origin" server. That makes it easier for websites to reach a broader global audience without setting up new origin servers. Cloudflare also shields those websites from bot-based attacks with its cybersecurity services.
Snowflake operates a usage-based model, in which companies only pay for the storage and computing power they use. Cloudflare provides a free tier along with higher-end tiers, which lock in its clients with stickier subscriptions.
Which company is growing faster?
Both companies are generating explosive growth by riding high on secular tailwinds. Snowflake benefits from a growing need among larger companies to break down the silos between their departments, centralize their data, and outmaneuver their competitors with smarter data-driven decisions. The growing popularity of data visualization platforms like Salesforce's Tableau, which pulls its real-time information from data warehouses, has also been fueling Snowflake's growth.
Snowflake's product revenue, which accounts for most its top line, surged 120% in fiscal 2021 (which ended in January 2021), 106% in fiscal 2022, and 70% in fiscal 2023. But for fiscal 2024, it only expects 34% growth as the macro headwinds intensify. Snowflake still aims to generate more than $10 billion in product revenue in fiscal 2029 -- which implies its top line could grow at a compound annual growth rate (CAGR) of at least 32% between fiscal 2023 and fiscal 2029.
Cloudflare benefits from rising internet speeds, the increased bandwidth requirements of media-intensive websites, and the escalating threat of bot-based attacks. It refers to itself as a "water filtration" system for the modern internet.
Its revenue rose 50% in 2020, 52% in 2021, and 49% in 2022. But for 2023, it expects its revenue to only rise 31% to 32% as it faces more macro headwinds. Unlike Snowflake, Cloudflare hasn't unveiled any longer-term estimates yet.
Which company is more profitable?
Snowflake and Cloudflare are both still unprofitable under generally accepted accounting principles (GAAP). But on a non-GAAP (adjusted) basis, which excludes stock-based compensation expenses, Snowflake turned profitable in fiscal 2022 and stayed in the black in fiscal 2023. Cloudflare also turned profitable for the first time on a non-GAAP basis in 2022.
Both companies are reining in their spending as their revenue growth slows down. Analysts expect Snowflake's adjusted earnings per share (EPS) to surge 136% in fiscal 2024, and for Cloudflare's adjusted EPS to rise 162% in 2023.
Which stock is the better value right now?
Snowflake and Cloudflare operate in different industries, but they face many of the same macroeconomic challenges. Based on analysts' expectations -- which investors should take with a grain of salt -- Snowflake and Cloudflare still don't look cheap at 18 times and 16 times this year's sales, respectively. Both stocks also trade at more than 200 times forward earnings.
Those high valuations could make both stocks unappealing as rising rates continue to drive investors toward more conservative investments. But if I had to pick one over the other, I'd stick with Cloudflare because its slowdown is less abrupt, its stock is slightly cheaper, and it doesn't face as many direct competitors as Snowflake -- which still needs to fend off formidable rivals like Amazon and Microsoft in the crowded data warehousing market.
