Snowflake: An Overvalued Data Warehousing Play

The emerging tech company has a promising set of developments but is a very expensive stock

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Jul 06, 2021
Summary
  • The company more than doubled its revenues in the recent quarter
  • Its recent partnership with C3.ai appears highly promising
  • The market seems to have already factored in future data warehousing revenue growth, which is why the stock has flattened
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Snowflake (SNOW, Financial) is an emerging technology player within the data warehousing space and is known to deliver on-demand cloud data warehousing solutions to enterprises. The company has strong storage and data sharing capabilities coupled with a flexible and independent architecture that allows storage, analytics and group computing.

The company was recently in the news for its partnership with artificial intelligence (AI, Financial) player C3.ai (NYSE:AI). The partnership will enable Snowflake’s consumers to access C3.ai’s AI Suite as well as its pre-built AI applications. Snowflake’s financial performance has also been particularly solid with a growing customer base and a robust retention rate. However, the stock’s pricing appears to be a bit steep in my view - steep enough to have already accounted for these promising growth prospects.

Recent financial performance

Snowflake reported its second consecutive all-around beat in a row in its first squarter of fiscal 2021. The company reported a top-line of $228.91 million, which was about $15.56 million above the analyst consensus estimate. The revenue grew a staggering 110% as compared to the corresponding quarter of 2020. The company also delivered an earnings surprise with its loss per share of 11 cents being 5 cents above the average Wall Street expectations. Snowflake had yet another quarter with a positive operating cash flow, generating $21.9 million in the form of operating cash, though it spent close to $264.1 million in investing activities, leaving it with a negative free cash flow.

Key growth drivers

The revenue of Snowflake more than doubled, and this was driven mainly by a huge jump in product revenue. This includes revenue from storage, compute and data transfer resources, which are expected to continue growing in the months to come. It is worth mentioning that these offerings are used by customers on a single as well as an integrated platform.

The company’s Remaining Performance Obligations (RPO) have increased 206% in the recent quarter and represent the amount of future expected revenue that hasn’t yet been recognized. The high RPO level is a big green flag for short-term investors. The company added 393 new customers and its total customer base is now at 4,532 as a result of strong sales and marketing efforts. Interestingly, the company has more than 100 customers generating $1 million or more revenue over the trailing 12 months. This has increased from just 77 three months ago.

Snowflake’s Chief Financial Officer, Mike Scarpelli, explained in the company’s first-quarter fiscal meeting that the company is highly focused on penetrating the largest enterprises from all over the world as they believe these enterprises provide the greatest opportunities for account expansion. The company has an excellent net revenue retention rate and the management hopes to maintain a number of more than 160% for the entire fiscal year.

The C3.ai partnership

Snowflake operates a cloud-based data warehouse for large enterprises. These large enterprises often store their data across an extensive range of computing platforms as well as software so that Snowflake separates those silos and pulls all the data onto a single cloud-based platform. Thus, there are definite synergies with C3.ai, which offers company AI services. Its AI Suite allows companies to build their personal AI services, which run on its systems. It also offers pre-built AI applications that can be plugged into an enterprise’s infrastructure.

Snowflake creates a unified data record for each enterprise, and it used to depend on the enterprises to decide how to access, process and visualize all the data. Under this new partnership, Snowflake will incorporate C3.ai’s tools into Snowpark, since AI software developers are already using Snowpark, so it’s a normal environment to display C3.ai’s systems. While C3.ai has served only 89 customers, it fulfills a gap in Snowflake’s offering, which is why the partnership appears to have a bright future.

Final thoughts

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As we can see in the above chart, Snowflake’s stock has recovered from the recent selloff and has maintained a more or less flat trajectory for the past three months. The company’s valuation of 14.15 times book value and 82.29 times revenues is phenomenal, and there is a high chance of multiples contraction if the company is not able to deliver on the revenues front.

The company should be able to capitalize on the growing prominence of data warehousing as enterprises continue to adopt public clouds like AWS and Azure. However, given the sky high valuations, I believe that it has a limited short-term upside, though it could become a good long-term investment if one can find a dip to buy on.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure