Snowflake: Is This Berkshire-Backed Growth Stock Worth a Look?

Snowflake's share price is down 38% from its highs in November 2021

Author's Avatar
Apr 05, 2022
Summary
  • Snowflake is a market leader in the data cloud, which enables companies to seamlessly exchange and pool their data together.
  • The company had its IPO in 2020 with a sky high valuation of $75 billion and a price-sales ratio of 156. 
  • Berkshire Hathaway famously invested into the stock pre-IPO, which many consider uncharacteristic of the value investing firm.
Article's Main Image

Snowflake (SNOW, Financial) is a market leader in the data cloud, which enables companies to seamlessly exchange and pool their data together. The company had its IPO in 2020 and came in at an eye-watering valuation of $75 billion with a price-sales ratio of 156. Since that point, the share price popped by 61% before correcting down by 38%.

1511270972345360384.png

Warren Buffett (Trades, Portfolio)’s investment firm, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), notably invested into the firm pre-IPO, reporting the holding to the SEC once the company went public. Many consider this to be an uncharacteristic move by the value investing firm. In this article, I'm going to dive into the business model, financials and valuation to see if the stock has become attractive to retail investors following the price correction.

Business model

Snowflake is a pioneer and leader in the data cloud. Historically, data was stored in silos. It was slow to access and difficult to analyze together. This was a major issue as big data has been called the “new gold,” but if it’s stuck in the ground, it’s not much use. The concept of the “time value of data” dictates that data is often the most valuable when first produced, thus a low latency solution such as the data cloud offers many opportunities to unlock value.

The Snowflake Marketplace enables data owners to exchange data with others, for free or for a fee. This has huge potential as companies can pool their vast data sets into the cloud and leverage each other's data to unlock greater value. The links of different data inside the cloud looks like a snowflake from the snowflake schema in traditional computing, which is where the company gets its name.

1511280259834650624.png

Source: Snowflake investor presentation

Many assume that Snowflake operates on a Software as a Service (SaaS) model, but according to their investor presentation, the company actually operates a consumption-based model with over 93% of revenue coming from this method.

Snowflake has recently launched a “retail data cloud,” which will help companies in the retail industry pool their data together to optimize operations and improve customer experience. In addition, the company has expanded its relationship with Amazon's (AMZN, Financial) Amazon Web Services, giving those companies which sell on Amazon access to purchase order (PO) data to allow them to estimate demand.

Competition

Amazon Web Services has its own data warehouse product called Redshift. They were very competitive with Snowflake historically, but now see each other as strategic allies, or “co-opetition." Snowflake has invested extensively into technical integrations with AWS. In addition, they signed a strategic collaboration agreement with both investing into partner sales and marketing. This is huge news and clearly aligns Snowflake with the number one player in the cloud. 1511280265052364800.png

Source: Snowflake investor presentation

Financials

Turning to financials, Snowflake currently has 5,900 customers and a net revenue retention rate of 174%. This means customers of the company are not just staying with them, but spending more. Revenue has risen a meteoric 361% from $264 million in 2020 to over $1.2 billion in the most recent fiscal year. Gross profit also jumped from $349 million in 2020 to $760 million in 2021, up 117%. However, operating losses have expanded to $715 million, though that does include a $466 million investment into R&D.

1511275857900019712.png

In terms of valuation, the price-sales ratio has declined substantially to 59, which is one of the cheapest valuations the firm has ever traded at historically. However, by any other estimate it is till not cheap. For example, International Business Machiness (IBM, Financial) trades at a price-sales ratio of just 2 and even Amazon trades at a price-sales ratio of 3.6.

1511276600170192896.png

Final thoughts

Snowflake is a market leader in the data cloud and is poised to further expand into this large and growing market. The company's financials have improved tremendously over the past few years and their partnership with Amazon will help them to stay competitive. The price-sales ratio has compressed considerably, but there are still a lot of bullish estimates baked into the stock, including 100% revenue growth for the next few years.

I believe this high growth is achievable given the company's offering and partnerships, but still adds risk to the investment case. I also noticed the CEO has a ridiculously high compensation package, which equated to $1.2 billion per year in stock options when the stock was trading at $400 per share. In addition, there has been a large number of insiders selling stock, and this isn't likely to ease up if the CEO's huge stock option package is anything to go by.

1511278386406825984.pngTherefore, given these red flags, while I believe Snowflake is definitely a company to watch, I also believe there are other opportunities in the market which offer a better risk/reward ratio.

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