Snowflake: This Funding Is Not For The Faint Hearted (NYSE:SNOW)

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Funding Thesis

Knowledge-driven is a phrase that has been thrown round for a while now, however how does an organisation change into data-driven? Prior to now, corporations have been in a position to deal with their very own ‘massive knowledge’, however massive knowledge has change into greater and greater – and companies are beginning to flip to specialists in an effort to make sense of all the information they gather.

Volume of data/information created, captured, copied, and consumed worldwide from 2010 to 2020, with forecasts from 2021 to 2025

Quantity of information/data created, captured, copied, and consumed worldwide from 2010 to 2020, with forecasts from 2021 to 2025 (Statista)

Enter Snowflake (NYSE:SNOW), a cloud knowledge platform that helps remodel the unimaginable quantity of information that corporations ingest day by day into actionable enterprise insights. The corporate is cloud-agnostic, that means that it could carry knowledge from any of the key cloud suppliers into one ‘single supply of fact’.

For me, probably the most compelling points of Snowflake as an funding is the sheer quantity of optionality that the corporate has, as our ‘data-driven’ future opens loads of alternatives.

Snowflake innovation roadmap

Snowflake Q2’23 Investor Presentation

You could have heard additionally the phrase ‘knowledge is the brand new oil’ thrown round over the previous 5 years (though admittedly, I do know which one I’d want a bit extra of proper now…), and Snowflake is the kind of enterprise to spend money on in the event you imagine this trope to be true.

So, does Snowflake appear like a very good funding proper now? I put it via my framework to seek out out.

Enterprise Overview

Snowflake operates a number one unbiased cloud knowledge platform, with a mission to ‘allow each organisation to be data-driven’. This platform is utilized by corporations throughout a mess of industries to consolidate their knowledge right into a single supply that can be utilized to create actionable insights, construct data-driven purposes, and share knowledge.

Snowflake operates a cloud data platform

Snowflake Q2’23 Investor Presentation

Maybe surprisingly, Snowflake operates a usage-based income mannequin. Its product income relies on every prospects’ consumption on Snowflake’s platform, versus a basic SaaS enterprise that receives subscription-based income no matter utilization.

Nearly all of Snowflake’s income comes from using storage, compute, and knowledge switch assets consumed on the platform. One of many advantages of this mannequin has been Snowflake’s potential to develop income quickly, as its prospects proceed to utilise increasingly more Snowflake options. This will clearly be seen by the stellar development in revenues that Snowflake has been having fun with.

Snowflake has grown revenue rapidly

Snowflake Q2’23 Investor Presentation

The corporate has additionally been named as a pacesetter in each the Gartner Magic Quadrant for Cloud Database Administration Methods and the Forrester Wave for Cloud Knowledge Warehouse. It’s price highlighting that, while Snowflake was named a pacesetter, it was not named as a transparent chief in both & doesn’t seem like the ‘Prime Canine’ within the area in keeping with these two sources.

Gartner magic quadrant for cloud database management systems snowflake

Gartner

Forrester Wave for Cloud Data Warehouse snowflake

Forrester Wave

But this could not distract from the astounding development that this enterprise has seen over the previous few years, so clearly the corporate is doing one thing proper – so what makes Snowflake such a strong enterprise?

Financial Moats

With each enterprise, I look to see if there are any sturdy aggressive benefits (aka financial moats) that can assist the corporate proceed to thrive while defending itself from competitors.

The obvious financial moat that Snowflake advantages from is excessive switching prices. As soon as an organization has embedded its knowledge into Snowflake’s Platform, there’s little or no incentive to change away; doing so can be an enormous problem. In reality, as soon as a buyer joins Snowflake’s platform, they find yourself spending much more cash with Snowflake as time passes. Simply check out Snowflake’s dollar-based web retention fee, which is certainly the perfect DBNRR that I’ve ever seen.

Snowflake has a world class retention rate

Snowflake Q2’23 Investor Presentation

Which means that not solely are buyer cohorts staying with Snowflake, however the quantity they’re spending is 71% greater than it was one yr in the past – completely loopy figures for an organization that has taken in ~$1.6 billion in revenues over the previous 12 months.

Switching prices, nonetheless, are a moat that may be seen throughout most cloud and knowledge companies. While this doesn’t make it any much less of a moat, it doesn’t essentially differentiate Snowflake from its opponents – however there’s something else that does.

I imagine that Snowflake advantages from a considerable community impact, and that is primarily because of the information sharing facet of its platform. Snowflake prospects have the power to share their knowledge with different Snowflake prospects (and receives a commission for doing so), and this will work as a incredible buyer acquisition instrument. If a Snowflake buyer desires to share knowledge with a non-Snowflake buyer, then that non-Snowflake buyer must change into a Snowflake buyer in an effort to profit from this knowledge sharing.

Snowflake refers to knowledge sharing as a ‘steady edge’, outlined as:

A “steady edge” is an edge that has produced at the least 20 transactions by which compute assets are consumed and such consumption leads to acknowledged product income over two successive three-week durations (with at the least 20 transactions in every interval).

Within the newest quarter (Q2’23), 21% of Snowflake prospects had at the least one steady edge, whereas in Q2’22 that determine was simply 15%. On the subject of the overall variety of prospects utilizing steady edges, the determine has been rising considerably quicker than Snowflake’s general buyer acquisition; while complete prospects grew 36% YoY in Q2’23, the variety of steady edges grew by a whopping 112% YoY. Contemplating that steady edges energy this community impact, it’s straightforward to see why I feel that is turning into one in every of Snowflake’s strongest financial moats.

Snowflake sees 21% of customers engaging in data sharing

Snowflake Q2’23 Investor Presentation

There is also a counter-positioning argument made for Snowflake, significantly in opposition to its cloud-provider opponents of AWS (AMZN), Google Cloud (GOOGL), and Microsoft Azure (MSFT). Snowflake operates an unbiased, agnostic, multi-cloud platform that may centralise knowledge no matter who the cloud supplier is. As corporations look to undertake a multi-cloud technique, Snowflake’s platform might show to be much more essential in guaranteeing extra independence inside prospects’ operations.

Outlook

As is implied by Snowflake’s excessive valuation (which we’ll get to later), the long run alternative is each big and increasing. The corporate sees the Cloud Knowledge Platform market dimension reaching $248B by CY26; by comparability, Snowflake’s income over the previous 12 months implies that it has captured simply ~0.7% of this huge alternative.

Snowflake TAM total addressable market is $248 billion in 2026

Snowflake Q2’23 Investor Presentation

I additionally imagine that the world will proceed to see the sheer quantity of information enhance exponentially over the upcoming decade, that means that corporations who can assist make use of this knowledge might be very-much in demand.

Snowflake has additionally proven its potential to create new options & merchandise for its prospects, and this potential to innovate might result in extra income sources sooner or later that I couldn’t even consider proper now.

In brief, I imagine that the outlook could be very vibrant for this firm.

Administration

On the subject of fast-paced, progressive corporations, I all the time goal to seek out founder-led companies the place inside possession is excessive. While Snowflake doesn’t have any founders within the CEO position, Co-Founders Benoit Dageville and Thierry Cruanes are each nonetheless concerned with the enterprise, having roles as President of Product and CTO, respectively.

In that CEO position is Frank Slootman, a seasoned government who was CEO of ServiceNow (NOW) from 2011-2017, guiding the corporate via its IPO course of.

Snowflake management team

Snowflake

I wish to spend money on corporations the place management has skin-in-the-game, and maybe surprisingly Snowflake ticks this field. I say surprisingly as a result of usually it’s the founders who personal essentially the most shares, however this isn’t the case for Snowflake – the truth is, Co-Founder Cruanes is just not even talked about within the newest proxy assertion.

The most important shock is that CEO Slootman is the most important insider proprietor, holding 4.1% of all shares excellent, adopted by Co-Founder Benoit Dageville & CFO Mike Scarpelli. Traders might lament the extent of stock-based compensation dished out by Snowflake (we’ll get to that), however I’m happy to see that insiders have a very good quantity of skin-in-the-game consequently.

Total, insiders personal slightly below 9% of all Snowflake shares excellent.

Snowflake has good levels of insider ownership

Snowflake 2022 Proxy Assertion / Excel

I additionally prefer to take a fast look on Glassdoor to get an concept in regards to the tradition of an organization, and Snowflake will get some nice scores from the 339 evaluations left by workers. Any rating over 4.0 is spectacular, and Snowflake achieves this nearly throughout the board.

Snowflake gets great reviews from employees on glassdoor

Glassdoor

The 2 gadgets that stand out to me as being nicely above common is the CEO approval ranking of 95% (one other nod to the job that Slootman is doing) in addition to the 86% Constructive Enterprise Outlook ranking. Usually, this ranking on Glassdoor is decrease, even for know-how corporations, so it goes to indicate that Snowflake workers really imagine this firm is on target for fulfillment.

Financials

Snowflake’s financials are not like most different companies, and it nonetheless blows my thoughts once I have a look at its income development. The corporate has seen triple digit YoY income development over the previous few years and has achieved a income CAGR of 133% from 2019 via to 2022 – which is much more spectacular when you think about that these development charges are off an already excessive base! In 2022, income grew by 106% to succeed in ~$1.2B.

Snowflake key financial metrics

Snowflake / Excel

But traders could also be involved in regards to the, erm, ‘barely’ destructive EBIT margins… and I perceive this concern. It’s not enjoyable to see an organization that seems to be shedding cash hand over fist, however if you wish to spend money on Snowflake, then this monetary profile is one thing you’ll have to just accept for the approaching years. The losses in 2021 and 2022 have been considerably impacted by stock-based compensation, with a very good quantity of this regarding Snowflake’s $33 billion IPO again in September 2020.

In case you are investing in Snowflake, then know that this enterprise is not going to be worthwhile for some time. It is going to reinvest in itself to attempt to seize as a lot market share as attainable – which is okay with me, as a result of this can be a big alternative & the platform itself has such excessive switching prices that aggressive buyer acquisition spending is sensible.

The principle cause that I’m comfy with these losses proper now could be due to Snowflake’s constructive free money move & impeccable stability sheet. The corporate has a web money place of ~$5.2B with zero debt, and it’s bringing in additional cash than it’s spending. So, while Snowflake could be making a considerable GAAP loss proper now, I don’t assume the enterprise itself is at any threat of going bust. These EBIT margins might not make for excellent studying, however they’re on track, and I imagine they may proceed to take action for years to return as Snowflake continues to scale.

The price of remaining free money move constructive is, sadly, shareholder dilution. This stock-based compensation has resulted in Snowflake’s shares excellent rising by slightly below 15% within the two years since its IPO, and the share worth itself hasn’t delivered for traders over that very same interval.

Chart
Knowledge by YCharts

I do perceive why traders are sad with Snowflake’s liberal use of stock-based compensation, and I would definitely prefer to see it ease up over the following few years (ideally to lower than 5% dilution yearly). However it’s not a dealbreaker for me…

Valuation

As with all excessive development, disruptive corporations, valuation is hard. I imagine that my strategy will give me an concept about whether or not Snowflake is insanely overvalued or undervalued, however valuation is the ultimate factor I have a look at – the standard of the enterprise itself is much extra essential in the long term.

Snowflake share price valuation model

Snowflake / Excel

In my base case state of affairs, I’ve assumed FY23 figures to be roughly according to administration’s newest steerage. When it comes to the event of income development and free money move margins, I’ve additionally used administration’s long-term enterprise outlook as a degree of reference.

Snowflake long term business model

Snowflake Q2’23 Investor Presentation

I’ve additionally assumed that shares excellent will enhance by a 6% CAGR over the interval, given Snowflake’s historical past of shareholder dilution.

The bull case state of affairs for my valuation mannequin is, maybe unsurprisingly, a income development story. I imagine that Snowflake is able to unlocking new income alternatives which are inconceivable for traders to see proper now, and this could assist the corporate proceed to develop its revenues at an accelerated tempo for the foreseeable future. My bear case state of affairs is basically the other, whereby Snowflake’s hyper-growth flattens out & a lot of the success that’s priced into its shares proper now doesn’t materialise.

Put all that collectively, and I can see Snowflake shares reaching a CAGR via to 2027 of (11%), 2%, and 15% in my respective bear, base, and bull case situations. To me, this suggests that the present share worth is ‘costly’, however not insanely so.

Dangers

Like many companies on the market, Snowflake runs the chance of being negatively impacted by a harsh and extended recession. While I feel the corporate is pretty recession-resistant as a result of business-critical nature of its platform, there’s a threat on account of its usage-based enterprise mannequin. If financial exercise slows down, then companies could also be receiving much less knowledge than ordinary, and due to this fact could also be working fewer queries, which might result in a discount in Snowflake’s income. I imagine that in the long term, the supply of information will exponentially enhance, however this can be a short-term threat to think about.

One other threat for Snowflake is competitors. It’s going up in opposition to some big FAANG opponents, and while it has been in a position to maintain its floor up to now, there’s all the time the chance that an Amazon or a Google might swoop in & provide you with an answer that’s extra interesting for purchasers. It additionally has extra direct competitors from the likes of Databricks, and the Gartner Magic Quadrant & Forrester Wave referenced earlier present that Snowflake is just not the clear trade chief but.

Lastly, as we simply noticed, the present share worth does suggest plenty of future development. If Snowflake fails to realize this stage of development, and even offers a sign that development is slowing down faster than anticipated, then shares might tumble fairly rapidly.

Backside Line

There may be an terrible lot to love about this enterprise; it’s in a quickly rising trade, it’s quickly rising itself, it has a historical past of discovering new income streams, it advantages from some highly effective financial moats, it has a stellar stability sheet, and it nonetheless has founders concerned. But it’s an virtually inconceivable firm to worth, and that has resulted in a rollercoaster experience for traders all through this risky market.

Chart
Knowledge by YCharts

I feel that Snowflake appears like a incredible funding for a specific sort of investor and appears like an funding to keep away from in any respect prices for one more sort. In case you are an investor who likes predictable companies & regular development, then avoiding Snowflake could also be greatest.

Nevertheless, if you’re an investor who’s okay with uncertainty, who understands that high quality companies can succeed for causes past your preliminary investing thesis (have a look at Amazon with AWS, Apple with the iPhone, and so on.), then Snowflake can appear like an especially engaging funding.

I fall barely extra into the second camp. When investing in excessive development, progressive companies, I don’t essentially search for predictability – I look for an organization that’s set as much as seize an enormous alternative forward of it, possessing sturdy aggressive benefits, with a historical past of accelerating its TAM via creating new income streams, and with skin-in-the-game to make sure shareholder incentives are aligned with administration.

Put all that collectively, and I’m going to provide Snowflake a ‘Purchase’ ranking. There are clear dangers with this funding, and I’ll place it accordingly inside my portfolio, however I do know that Snowflake is an organization that I need in my portfolio for the upcoming decade.

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