Few companies represented the froth in the IPO market better than Snowflake (SNOW 3.95%) when it came public in late 2020. After reaching hilariously high valuation levels of 180 times sales, the stock price abruptly came down and now sits around $150, well below its debut price of about $245.
But that's in the past. What matters now is Snowflake's stock moving forward. So has the stock fallen enough to warrant a purchase? Let's find out.
Snowflake has consistently grown its revenue
Part of the allure of cloud computing is its ability to process vast amounts of data quickly. Furthermore, storing this information is also easier, as a massive data center can hold more information than a personal computer.
Snowflake's products assist companies with this practice, as its products provide solutions for storing data, running analysis on this information, and funneling insights into external applications to make real-time decisions with the most up-to-date information.
This product has proven wildly popular, showcased by Snowflake's best-in-class 151% net retention rate, which means customers spent $151 this year for every $100 they spent last year. While this metric has steadily ticked down during Snowflake's time on the public markets, that's mainly due to Snowflake's slowing growth, which in turn is caused by its size.
SNOW Revenue (TTM) data by YCharts
This begs the question, What is a sustainable growth rate for Snowflake? For FY 2024 (ending January 31, 2024), Snowflake is guiding for 34% product revenue growth, which indicates a further slowdown from its current levels.
While many companies would be elated by the growth of that level, is it fast enough to justify Snowflake's significant (and growing) losses?
Snowflake isn't following the industry trend of becoming more efficient
Snowflake isn't anywhere close to profitable. Its operating loss grew from $189 million in Q1 FY 2023 to $273 million in FY 2024. That's a 44% increase, nearly identical to its revenue growth. This reflects a trend that has become prevalent over the past year: Snowflake isn't attempting to become more efficient.
SNOW Operating Margin (Quarterly) data by YCharts
With Snowflake's steady mid-40% operating loss margin, it has a deep hole to climb out of before cracking into profitability. The culprit for this loss? Stock-based compensation.
In Q1, Snowflake's stock-based compensation bill was $288 million. Snowflake would have produced a 2% operating profit margin without that expense. However, investors shouldn't give Snowflake the benefit of the doubt here; this is a real expense because stock is an integral part of many employees' salaries.
When you issue shares constantly to employees, it causes the share count to rise. This dilutes existing shareholders, as one share doesn't own as much of the company as it used to. This mechanism can be likened to how inflation decreases the purchasing power of a dollar. With Snowflake's share count rapidly rising, anyone who bought in at the IPO has decreased their per-share company claim significantly.
SNOW Shares Outstanding data by YCharts
That's not a great sign for the company, but Snowflake may be worth an investment if the stock is cheap enough. However, Snowflake's stock still trades at an expensive 21 times sales. Even if you use a metric like price to free cash flow (FCF) (which subtracts stock-based compensation), Snowflake trades at 79 times FCF.
Plenty of stocks trade at cheaper valuations and are growing faster than Snowflake, like CrowdStrike (CRWD 2.25%). Until Snowflake shows that it cares about becoming more efficient and reaching true profitability, I will pass on the stock.
