SNOW Overvalued or Undervalued?

Investment Analysis Clubs Saul’s Investing Discussions
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I was really tired of all the FSLY chatter so thought I would take it upon myself to start a Snowflake thread. I just started a small position in this and I am considering adding more.

For those that don’t know:

SNOW or Snowflake Inc. is a cloud-based data-warehousing company that was founded in 2012. It has raised more than $1.4 billion in venture capital, and is based in San Mateo, California. It was publicly launched by Bob Muglia in 2014 after two years in stealth mode. Snowflake offers a cloud-based data storage and analytics service, generally termed “data warehouse-as-a-service”. It allows corporate users to store and analyze data using cloud-based hardware and software. Snowflake runs on Amazon S3 since 2014, on Microsoft Azure since 2018 and on the Google Cloud Platform since 2019. Its Snowflake Data Exchange allows customers to discover, exchange and securely share data.

It went public only a few weeks ago and Warre Buffett of all people was in on the IPO. The growth numbers they report are crazy, second only to ZM.

Q2 2021
REVENUE 133.15M
up 120.66%

NET INCOME -77.63M
up 16.89%

NET PROFIT MARGIN -58.31%
up 62.34%

OPERATING INCOME -77.68M
up 18.72%

But of course, the big question is, is SNOW overvalued? Many say yes. Today it’s valued at 73.57B which is 182 times trailing-12-month sales of $402.7 million. Full-year revenue is a forecast at $565.8 million, which knocks it down to 130 times 12-month revenues but still gives it a rich valuation. And it’s higher than ZM which is at 100 times 12-month trailing revenues today.

But, the difference between SNOW and ZM is:

  • SNOW has high switching costs, anyone can swap out ZM if they want and try an alternative
  • SNOW usage-based model, as opposed to a fixed price like ZM
  • SNOW provides core services that keep operations up and running, ZM does not

I am considering adding more. I like to nibble here and there as I get more positive feedback building a position over time. I was curious about what other people thought?

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I think SNOW is really hard to fully grok, and that’s coming from someone who has had past professional lives doing Database Administration for both “Transactional” and “Data Warehouse” databases.

Real understanding of what SNOW does spans a LOT of material including but certainly not limited to:

  1. The difference between a “database” and a RELATIONAL database
  2. The difference between a Relational Database vs. a Data Warehouse vs. a Data Lake
  3. The different between “Structured” and “Unstructured” data
  4. The process of ETL: “Extract, Transform, Load” vs. MapReduce
  5. And on and on
  6. The (potentially ginormous) network effect that SNOW may end up achieving, and precisely how their platform could effect it better than their competitors can (IMO, this is the wild card, and it could have HUGE implications).

Understanding all of the above, AND all of the players and how they compare is a real daunting task.

I’ve bought literally a few shares, and I’m not sure where to go from here.
But I think this is a real chance to put the practices of this board to use:

  1. Understand the basics of the story
  2. Determine whether the numbers and their trajectory support the story
  3. If the numbers support the story, buy it
  4. Focus on the direction of the numbers, and Company’s execution…NOT on the price.

I’m new here, so I haven’t earned the right to be funny about it, but due to its valuation I do think SNOW is a great opportunity to test one’s commitment to the approach.

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This is a good analysis from Beth Kindig on SNOW.
https://www.forbes.com/sites/bethkindig/2020/09/11/snowflake…

For me, I am going to keep picking up a few shares here and there on any weakness. The market overall has been volatile this month, but SNOW has remained strong. And with everyone waiting for the price of SNOW to come down, will it? Hence my nibble strategy.

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@Intjudo,
Thank you very much for the insights.

On #6, Network Effect, are you referring to their Marketplace? Ability for companies to share their datasets quickly, securely on the platform and perhaps monetize?
Could you please expand on this?
Who is their competition?
Will vendors(or clients) such as DnB, LexisNexis, WestLaw, Walter Kluwers, etc. put up their data sets on the platform?

Thank you

-F8

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There is a great perspective on the strength of SNOW’s leadership in this podcast https://investorfieldguide.com/brad-gerstner-and-rich-barton…

I also spoke with a friend who works in B2B Saas and they have partnered with SNOW. He said he feels very good about SNOW and the support they are receiving. Good to get that perspective from someone actually involved directly with the company.

By most metrics it is ‘overvalued’ but we’ve learned the danger of that word and how meaningless it can be - ZM is a great example. As Saul shared so many people say it was overvalued based on metrics when it was at $150…

I’ve started making small investments into SNOW, even though it may keep coming down - as it is today along with almost everything else… but I believe the long term prospects of the business are great. Check the podcast for more info on that.

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Imo you can’t look at ZMs high valuation as a reason for SNOW being fairly valued.

One is growing just over 100% revenue, the other is over 300%. One is deep red FCF, the other has a FCF margin over 50%.

Love Snow’s business and Mr. Slootman but SNOW is overvalued. Maybe this correction will create a buying opportunity.

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FYI: This post includes a lot about EV/S/Oomph when 14 months ago many here liked it and Saul went as far as modifying it to his liking as well.

I love almost everything about Snowflake and I believe the valuation will be easily taken care of by their massive TAM, https://hhhypergrowth.com/a-snowflake-deep-dive/.

My concern is margins.
I’ve read that the costs incurred by Snowflake from the centralized cloud (AWS, Azure, and GPC) are a concern. Do you believe that these costs are what is primarily responsible for their margins being 60%, only low when comparing against the favorites here on Saul’s Board I know. But since we’re discussing this here I’ll ask?

14 months ago Saul posted his appreciation for the relative values in the equation EV/S/Oomph, https://discussion.fool.com/MessagePrint.aspx?mid=34201747. Multiplying 20% to Rev Growth x Margins (due to recurring revenue)

I haven’t read much lately about the importance of Gross Profit Margins relative to revenue growth; but, when it was discussed here at great length 14 months ago, I came to see some relationships that have served me well.

The equation EV/S/Oomph When Oomph = GPM*(1 + %Sales Growth QoQ)^2
is better explained in the above links.

Simply said the EV/S that we all know is divided by the square of sales growth times Gross Margins. Meaning that Revenue Growth being squared and in the denominator with GM, when using this equation, is by far the most important factor in valuing a company. Next would be margins. Take those and multiply them together and take the product and multiply that time 20% for what Saul believed was adequate for the consideration of recurring revenue.

So, There was a little conversation recently about the value of Gross Margins In a recent thread. I believe Snowflake would make a good example for how to apply these metrics not for basic valuation as in EV/S but EV/S/O and perhaps using Saul’s bump as though the revenue is recurring. Make sense? Well not to confuse things too much, I’d like to use Revenue Growth YoY instead of QoQ as was agreed to by Saul and others 14 months ago. I do this mostly because it’s easier to get and as long we’re comparing apples to apples I don’t see the problem. Please tell me If you feel differently.

Snowflake, per Seeking Alpha stats
EV =$77.55B They have some cash added to Market cap
Sales= 402.66M
EV/S=192.59

Revenue Growth y/y, per Seeking Alpha= 173%
Gross Profit Margin= 61.01%

Oomph = GPM*(1 + %Sales Growth QoQ)^2 1.2
.61(1+ 1.73)^2*1.2=5.45

EV/S/O= 192.59/5.45
EV/S/O=35.22

Let’s compare that to Zm

EV/S per Seekimg Alpha= 107

RevGr=355%
GM=73%

GM*(1+%Sales Gr QoQ)^2
.73*(1+3.55)^21.2=.7320.7*1.2= 18.13

EV/S/O= 107/18.13= 5.9

And CRWD

EV/S=42.57
Rev Gr=86%
GM=72%

.72(1+.86)^2*1.2= 2.98

DDOG

EV/S=59.48
Rev Gr=.80
GM=.78

.78(1+.8)^2*1.2= 3.03

SNOW 35.22

Zm. 5.9

DDOG. 3.03

The lower the number the more reasonable the valuation when considering this metric.

Does anyone care to comment at this point?

Jason

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