SNOW: What are we expecting?

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Hi all,

SNOW is a 2% position for me. But I wanted to focus on our (the board’s) expectations for the company.

What do “we” think revenue will do? What do we think margins will be? What do we think profit will be?

As a starter, they stated in the conference call:

“In advance of our Investor Day, I would like to update our fiscal year 2029 targets. For fiscal year 2029, we are reiterating our target for product revenue of $10 billion, growing 30% year-over-year. We are increasing our margin targets and now expect on a non-GAAP basis approximately 78% product gross margin, 20% operating margin and 25% adjusted free cash flow margin.”

They’ve just reported Q1 F2023. So thats 7 years to get to $10B in revenue at a 20% operating margin. Starting at TTM product revenue of $1.3B, maybe fiscal year growth looks something like:

2023: 60%
24: 50%
25: 38%
26: 30%
27: 25%
28: 20%
2029: 20%

And product revenue therefore looks like:
23: $2.1B
24: $3.1B
25: $4.3B
26: $5.7B,
27: $7.0B,
28: $8.5B
29: $10.0B

to match what management have told us they’re targeting.

With a 20% (non-GAAP) operating margin, so roughly $2.1B in operating dollars.

If we ignore the non-GAAP, and assume taxes are zero because of previous losses, let’s take that $2.1B and call it net profit. Let’s also ignore (holds nose and closes mouth) their stock-based compensation.

SNOWs current EV is $38.2B. If we want a 15% CAGR (my minimum goal) over 7 years, that EV will be
38.246*(1.15^7) = $102B.

So that suggests our EV/S would need 10x to hit my minimum and PE would be 50 (using EV instead of market cap and ignoring taxes etc).

Is this what “we” (as a board) are expecting? More? Less? Higher 10x multiplier? More profit?

The other question is: Are there better stocks that are likely to hit my minimum with less risk? (SBC ugh. Sales and marketing spend ugh).

My big concerns with SNOW are:

  1. Massive S&M spend.
  2. Massive stock-based compensation (40% of revenue).
  3. Possibly cyclical as customers spending waxes and wanes with economy.

cheers
Greg

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This might sound crazy because it is a FY29 target (sounds insane to target out that far)… but I think the $10B FY 29 target is very conservative.

Knowing this management team and their track record at Servicenow and Snowflake, I believe they took into consideration that establishing FY29 targets potentially already loses them credibility… so they had to be conservative with the revenue target in order to not seem ludicrous.

I think they’re able to make those FY29 targets because of their experience and the relative predictability of the growth of data + their insights into customer demand.

Of course something could happen economically that derails these targets, but I think Snowflake is one of the most credible businesses and management teams to trust with lofty targets.

I was very happy that they affirmed the FY 29 revenue target, but increased Non-GAAP operating margin and Non-Gaap FCF margin from 10% and 15% to 20% and 25% respectively.

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Hi sarksnz,

My expectations are that SNOW will be at ~$17bil revenue for FY29. This is ~45% revenue CAGR (they are guiding YoY product revenue growth growth to still be 30% in FY29, this is part of the reason I think the $10bil number is a sandbag/bear case scenario). I think this Q management has baked a recession into their $1.9bil FY23 guide and into the FY29 guide. If we weren’t having so many macro problems I believe they would have significantly raised the FY29 revenue target from $10bil as well. If we don’t get a recession then I think the FY23 growth will show up at 80%+.

When looking at potential MC in FY29 I would use FCF guidance instead of revenue multiple. Since the company will be at a stage where FCF can be used. I look at what similar large cap software stocks are trading at right now (valuations are obviously in the gutter currently). NOW is growing revenue in the mid-20% and trades at a P/FCF(ttm) of 45x. TEAM with ~33% growth is at 58x. So I think 50x FCF would be reasonable for 30% growth.

Using the $17bil sales I expect and 25% FCF margin they are guiding to, that is $4.25bil FCF in FY29. $4.25bil x 50 = $212.5bil. Dilution would put a dent in that, but who knows how much? This may be a bull case, but I am not going to let the current macro issues shift my beliefs on SNOW’s future prospects. SNOW is still in hypergrowth mode even with the short term headwinds some of their customers are seeing, S&M spend and high SBC are expected for companies growing sales at 80%+. To your third concern… all business have a cyclical component weighing on them or pushing them sometimes, even if they are riding a large secular trend like SNOW is.

Long SNOW, bought more today in the washout this morning. Best of luck to all of this and hopefully a better rest of the year. It will get better.
Bnh

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My big concerns with SNOW…Massive stock-based compensation (40% of revenue).

Can we put to rest the issue of SNOW’s SBC already?

From the S1 filing at IPO, the expected SBC and share dilution was already known far in advance.

Back in 2020, everyone knew the diluted share count would hit 360M today. There is nothing surprising here.

Here is an article complaining about SBC back at IPO in September 2020: https://fortune.com/2020/09/17/snowflake-ipo-successful-stoc…

…its total shares outstanding will grow substantially in the years ahead as employees cash in their generous equity grants…it looks like almost all of those 80 million shares-in-waiting will add to Snowflake’s current float of around 280 million, lifting the total by 29% to 360 million.

Everybody knew the share count would hit 360 million long ago and it hasn’t changed since IPO.

SNOW has guided for 360M diluted share count for this year since two quarters ago and also guided for 1% share dilution per year moving forward.

The SBC you are worried about today, is a problem in the past. I would think of the 80 million shares added as a one time drawn out IPO charge/event. Focus on the future: there isn’t going to be significant dilution.

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Why would the market offer a 50 P/E to a 20% grower? High-end would probably be 25 P/E at that point, making it around a 51b mkt cap.

Of course, my point is moot if they are still growing 35-40+ when they hit $10b/yr, which all the major cloud providers seem to be able to do easily thus far.

Finally - this board likely won’t be holding the stock thru 2028/2029, once growth dips under 50% per year, so also a moot point.

Dreamer

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@XMFALieberman - I’m guessing its conservative as well. I’m trying to work out what the board expectations are as a range, and then work out what that means for top-line growth, and subsequent multiples etc. Any projections?

@bnh - $17B awesome :slight_smile: that sounds reasonable. 45% CAGR is a bunch higher than they’re guiding to, so what gives you confidence? and what would dent your confidence?

@jonwayne, thanks for that. Have you got a link where they guide to 1%? I’ve seen them mention, but haven’t seen a guide. I shouldn’t have mentioned my own personal issues with SNOW. I’m more interested in what you think about revenue growth, margins, etc. What are your views on SNOW the business and how that reflects into 2029 vs the $10B revenue, 20% op margin, 25% FCF margin they’re ‘targeting’?

Another interesting note as I parse their results…

In the last 12 months (excluding this quarter), they’ve spent (GAAP) $743m on sales and marketing. This quarter, they added $25m in quarterly product gross profit dollars, so $100m annually (not including expansion).

Another way of looking at it: They’ve spent $821m in the last twelve months (including this quarter) to add 1790 customers, $460k per customer. I assume that cost is the cost of supporting the (significant) effort of replacing existing data warehouses.

cheers
Greg

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Hi Greg–

I think the $10bn of product revenue in FY 2029 is super conservative. I think that a company like SNOW, a category leader with an addressable market (data cloud) which is basically unquantifiable, will probably continue to grow at least around 45-50% per year for the next six years. And at a 50% CAGR they would get to $21.6bn in product revenue by 2029 (starting from the $1.9bn they guided for the current FY). I would argue that they could do better than that, given the immense market opportunity, but I believe a 45-50% CAGR should be attainable.
The key is believing in the company, its market opportunity, and its management team, and holding the stock with a long-term view, which is something very hard to do if one is ready to sell after any slight quarterly deceleration. Value creation is not linear.

Also, where did you get the $38bn EV?

I usually calculate these amounts myself as I don’t trust places like Yahoo Finance, Google Finance, etc.

Here’s my calculation:

Yesterday’s closing price $126.8*324,592,583 shares outstanding as of March 18, 2022 as per their 10-K (they haven’t filed this quarter’s 10-Q yet, so we have to go with share count official numbers as per their latest filing) → I have added unvested RSAs and RSUs of 9,992,583 to their total outstanding common shares (314.6m).
This gives a total Equity Value of $41,158,340.
To this number, I add the value of all options outstanding, which they provide in the 10-K as being equal to $11,283,299. But that was calculated with SNOW’s share price as of January 31st 2022, which was $275.9. So I re-did a quick and dirty calculation (meaning, I didn’t use a Black and Scholes model but I simply multiplied the number of options by the difference of the current share price and the weighted average exercise price that they provide in the 10-K) and with today’s share price that number goes down to $5,014,480.
Adding this number to the equity value I get an “adjusted” equity value of $46,172,820.
At April 30, 2022, they had $1,063,401 of cash and equivalents, $2,751,679 of short-term investments, $1,212,378 of long-term investments, and $206,549 of operating lease liabilities (current and non-current). So their net cash was $4,820,909, which I subtract from the adjusted equity value to finally get to the Enterprise Value (EV) of $41,351,911.
Not dramatically different from the $38bn that you used, but accurate.

Silvio–
long SNOW

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Hi Silvio, that sounds like a good way of calculating EV. I calculate it more simply which overlooks the RSUs and Options. I’m just using marketCap + debt - cash and equivalents.

cheers
Greg

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SNOW is still way too expensive (in my opinion!) in the actual market especially because the company has a consumption model and is therefore not a SAAS-company. A potential recession could hit the business model a lot harder than other SAAS-companies and therefore need to be accounted for in the valuation. It is not that easy to unsubscribe to a software that is essential but it is much more easier to lower your usage especially if the economic activity slows.

“Just switching” is not easy with software. Everybody knows that so companies won’t do that as easily as to reduce usage. They could reduce the number of licences for SAAS software but long before that reduction the usage of the program goes down. If you then have a subscription model your revenue goes down a lot quicker and also automatically while for a subscription model the company has to actively renegotiate the SAAS contract. In our company we have a lot of software that is used a lot less than in the past but we still pay the same price because there are other things that are more important at the moment than to reduce a few thousand bucks at some software. With the software of SNOW the reduction will come naturally!

You need really strong conviction to buy the “most expensive” company in an an already high PE/ high… EV/Sales space before a confirmed market bottom is in, and a confirmed uptrend resumes. You might miss some upside, but this stock could also easily be down double digits from here. Tons of fast money buyers are upside down, so lots of overhead supply too.

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