Warming Up to Snowflake After a Long Winter

Cloud computing data management leader Snowflake (NYSE:SNOW) was one of 2020’s hottest initial public offerings (IPOs). SNOW stock opened trade in September around $250 per share. Traders immediately gravitated to the name; within a couple months, SNOW stock peaked at $429 per share.

Snowflake (SNOW) IPO on the NYSE
Source: rblfmr / Shutterstock.com

Since then, however, the stock has gone into hibernation. Shares have dropped as much as 50% since that recent high, and the stock neared its 52-week low once again in March. While tech stocks may continue to struggle in the current economic environment, it’s time to start looking for bargains. And in SNOW stock, we have one of the most interesting growth stories out there today.

Bet the Jockey: Snowflake’s CEO Is A Star

CEO Frank Slootman is the perfect CEO for Snowflake at this time. He’s not the most famous CEO in Silicon Valley, admittedly. However, he has quietly generated one of the best track records in the industry. His first job was at Data Domain. He took over in 2001, when it had just 20 employees and didn’t have revenues yet. Within seven years, under Slootman’s watch, sales jumped to a billion dollars annually and he sold it to EMC for a great price.

Data Domain wasn’t his only win, either. After Data Domain, Slootman next took over at ServiceNow (NYSE:NOW). NOW stock has turned into one of the biggest software-as-a-service (SaaS) winners ever. When ServiceNow named Slootman CEO in 2011, however, NOW stock traded for just $25 per share. He remained in charge through 2017, during which time ServiceNow stock more than tripled.

After that, Slootman stepped aside, and appeared like he might enjoy some time off. However, he came out of retirement because the opportunity at Snowflake was just so compelling. In a 2019 interview, Slootman said that Snowflake compelled him to become a CEO again:

Snowflake is a special company, they just don’t come along often. I could not resist having an opportunity to bring something to market this promising.

And in Snowflake, he’s found the chance to build the next Data Domain or ServiceNow. Part of Slootman’s genius was getting into huge secular growth trends with data storage (Data Domain) and SaaS. Now, in Snowflake, Slootman leads another firm right at the cutting edge, this time in cloud computing.

Snowflake: Next Generation Data Management

With everything going on the cloud, it has created new issues for companies. Many companies are stuck with a hodgepodge of data stored in various places. Companies have multiple databases, multiple user authentication schemes, and so on. This creates many redundancies and potential security issues.

Snowflake’s purpose is to solve this. It allows administrators to operate a single unified cloud data network. This can manage all the data analysis, processing, science, sharing, and so on from one place. Snowflake customers can also seamlessly share data with each other within the platform.

As Slootman explained it, Snowflake has a unique advantage versus its rivals. Most SaaS companies aren’t optimized for one particular channel. These software packages operate similarly whether installed on-premise or over the cloud.

Snowflake, however, is a cloud-native system. By building a more specialized product, Snowflake has been able to optimize its performance specifically just for handling cloud applications. Snowflake’s founders, in fact, deliberately decided to ignore on-premise computing, and committed entirely to the cloud.

The Strategy Is Paying Off

For now, Snowflake’s valuation seems rather rich. After all, a $60 billion market capitalization for $600 million in trailing revenues is quite steep. Look further into the details, however, and things are more compelling. For one thing, Snowflake sees a $14 billion market opportunity in data warehousing and $81 billion in cloud data platforms. Thus, we’re just at the beginning of Snowflake’s growth runway.

And, so far, Snowflake appears to be able to deliver the goods. For Q4, the company grew revenues 116% year-over-year. That’s one of the fastest growth rates out there for a large SaaS company.

Even more impressively, Snowflake has a jaw-dropping 168% net revenue retention rate. This means that, even after accounting for churn, Snowflake’s customers are spending 68% more with the company than they did in the previous year. As Snowflake’s customers grow, they naturally will spend more and more to store and manage their data on Snowflake’s cloud.

With so much organic growth this way, Snowflake should be able to spend much less on sales and marketing than most rival firms. This should give Snowflake huge operating leverage as its revenues grow. Thus, it should start producing generous profits and free cash flow within the next few years.

SNOW Stock Verdict

I’ve wanted to own Snowflake stock ever since its IPO. This is one of the most exciting software companies out there on the market. And it’s led by one of the true genius CEOs of the technology industry. Snowflake has all the signs of being an excellent long-term investment.

The main issue so far has been valuation. With SNOW stock up at $300 and particularly $400 a few months ago, it was hard to justify the price. At one point, the stock hit almost 200x trailing revenues, which is stunning.

Now though, between the stock price dropping and revenue growth, things are looking better. Analysts see Snowflake’s revenues topping $1.0 billion this year. Meanwhile, the stock price has dropped sharply. Put it together, and the forward P/S is now down to 65x or so. That’s still expensive, no doubt. But for a company growing at a triple-digit rate, Snowflake could well be worth the premium price.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2021/03/warming-up-to-snowflake-after-a-long-winter/.

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