Hi guys
What I often read here is that Snowflake is too expensive to buy. I therefore had a look at Datadog and if you were long DDOG last summer (most people were), you should take a second look at SNOW too.
Snowflake currently trades at 51 times forward (2021) revenue, with 1.1 billion expected revenue and 56 billion EV
In July 2020, DDOG was trading at 96 dollars with 330 million shares outstanding. This gave them an EV of 31.6 billion. DDOG achieved 603 million in revenue in 2020, implying that they were trading at 52 times forward revenue.
In summary, DDOG was growing in the low 80% at that time and was valued relatively higher than SNOW now, growing at almost 120%!! Not too mention that SNOW may very well exceed those 1.1 billion revenue estimates and arguably has a larger TAM and more opportunities for continued strong growth.
My point is, SNOW is not as overvalued as it may appear. Everyone believed in DDOG at that time (and they still do), I therefore believe that SNOW also deserves more attention after the 45% drop from its ATH.
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Hi Ruben,
I think your point kind of proves how much of a drag SNOW’s valuation will have on its stock price going forward, at this point in time. DDOG, for all of its growth, has never eclipsed the mid 110s, I nibbled a bit last summer when it fell into the low 80s, but even then it was a bit too expensive - even at its highs the return (less than 50%) would have paled compared to some of the other companies discussed around here. Its revenue has finally caught up to its valuation and I would say DDOG is fairly valued at this point, while SNOW’s is still excessive and I wouldn’t be surprised if it straddles and never breaks 300 for the next year
I know a lot of folks on the board buy into the “valuation doesn’t matter for our stocks” camp, but I think there’s still a bit of gravity on stocks that are too richly valued relative to their revenue and growth rates. But imo it’s a personal decision for each investor.
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Snowflake currently trades at 51 times forward (2021) revenue, with 1.1 billion expected revenue and 56 billion EV
In July 2020, DDOG was trading at 96 dollars with 330 million shares outstanding. This gave them an EV of 31.6 billion. DDOG achieved 603 million in revenue in 2020, implying that they were trading at 52 times forward revenue.
Hi Ruben
I would suggest that the big factor you’re leaving out of this comparison is gross margins. SNOW’s margins recently have been less than 60%, while DDOG’s margins are closer to 80%. So there is still a bigger divergence looking at price vs forward GM.
That being said, SNOW’s valuation is not as crazy as it was. I’m definitely keeping a closer eye on them right now because, if it comes down another 20-25% or so, I might dip my toe in. Even if it doesn’t come down further, they could be a good investment from today’s prices. I just see too many other companies I like that are closer to screaming-buy territory right now, that it’s going to be hard for me to expand into a new position like SNOW, or even TDOC, for a while
-mekong
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Snowflake currently trades at 51 times forward (2021) revenue, with 1.1 billion expected revenue and 56 billion EV
In July 2020, DDOG was trading at 96 dollars with 330 million shares outstanding. This gave them an EV of 31.6 billion. DDOG achieved 603 million in revenue in 2020, implying that they were trading at 52 times forward revenue.
Hey Ruben,
I also wanted to comment on this statement, it looks like you’re looking at SNOW’s EV/S for the next twelve months (NTM) to calculate the current forward EV/S (as you should). But when you compare that to DDOG, you’re taking stats from July, but using the full year 2020 rev (which would be 2 quarters from the past, and 2 quarters looking forward, so not true forward EV/S). To get the forward EV/S for DDOG with the July 2020 stats you used for EV ($31.6B), you should take the NTM revenue from July 2020.
3Q20 - $155M
4Q20 - $178M
1Q21 - $201M (estimated with 13% QoQ growth, seems to be the consensus to get a low 60% growth in 2021)
2Q21 - $227M (same)
For a total NTM rev of $761M, giving a forward EV/S for DDOG from last July 2020 of 41.5 (and of course MUCH lower than that now).
I’ve also been one that wouldn’t touch SNOW because of the huge valuation, I’ve just never seen much room for stock price appreciation at even the current valuation, forward EV/S over 50, even AFTER this harsh high growth rotation we’re witnessing. Their numbers are impressive, but for me, not impressive enough for their current price. Their price/valuation will have to drop farther for me to find a spot for them in my portfolio.
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Well, this may be true, or maybe not. Depends on how long you wait for this thing to go up.
All I know is that I made a very, very, bad mistake in buying this stock and not thoroughly looking at it from all angles and viewpoints. So, I’m looking through the lens of buying this thing at the stock and seeing it sink shortly thereafter. Oh my!, this old dog has to keep on remembering the basic principles of investing…research, research, research.
Lucky Dog
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My point is, SNOW is not as overvalued as it may appear. Everyone believed in DDOG at that time (and they still do), I therefore believe that SNOW also deserves more attention after the 45% drop from its ATH.
I don’t own SNOW but one important point for Snow is that Snowflake usage with a client is likely to snowball.
This means that once the streams of data start hydrating data into Snowflake, it grows rapidly.
Revenue per client grows quickly without any incremental sales or client acquisition efforts.
The revenue is based on compute and storage resources used.
It is a lock in to automatically grow and potentially grow exponentially.
This is unlike other SaaS companies where you have to sell additional modules or bring in more users.
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dividends20, that’s an interesting point. But if other SaaS companies need to sell and develop additional modules, I would them to have lower margins and snowflake. What is snowflake spending the most money on?
dividends20, that’s an interesting point. But if other SaaS companies need to sell and develop additional modules, I would them to have lower margins and snowflake. What is snowflake spending the most money on?
Based on their 10-Q for 2020 Q3, page 35
Cost of revenue consists of cost of product revenue and cost of professional services and other revenue. Cost of revenue also includes allocated overhead costs.
Cost of product revenue. Cost of product revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with our customers’ use of our platform and the deployment and maintenance of our platform on public clouds, including different regional deployments, and personnel-related costs associated with customer support and maintaining service availability and security of our platform, including salaries, benefits, bonuses, and stock-based compensation. We periodically receive credits from third-party cloud providers that are recorded as a reduction to the third-party cloud infrastructure expenses. Cost of product revenue also includes amortization of internal-use software development costs, amortization of acquired developed technology intangible assets, amortization of cloud provider marketplace listing fees, and expenses associated with software and subscription services dedicated for use by our customer support team and our engineering team responsible for maintaining our platform
In other words, most of the cost of product revenue goes to paying for cloud infrastructure (probably AWS). For every dollar Snowflake sell, Amazon takes a 35 cents cut.
This part is my speculation. Cloud computing costs generally only go down. So as AWS makes compute cheaper, Snowflake will probably have to do the same, and SNOW’s product gross margin will likely stay the same in the future. This means gross profit per TB of data processed will go down. But-
I have only seen the amount of data processed rise exponentially to fill the compute budget in companies and never the other way around, so I would agree with dividend20’s point. This makes Snowflake more attractive to me than I initially thought.
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What is snowflake spending the most money on?
Snowflake’s roadmap is very interesting.
They don’t spend money on foundational storage and compute - they use what AWS/Azure provides (like any SaaS provider)
They are spending money on creating an ecosystem around their data warehouse.
Snowflake is doing to AWS what AWS is doing to displace other competing vendors.
There are many ETL/ELT tools like Informatica, Talend etc., many reporting/visualization tools like Tableau, many AI/ML tools like Sagemaker, Watson, Tensorflow etc. AWS offers a large data related services like DataPipeline, EMR, Redshift, Kinesis etc.
Snowflake is creating an ecosystem around their warehouse or simply put they are creating “Snowflake Cloud” without having to invest in expensive compute and storage.
I like the strategy. It is “asset light/software based” and super smart.
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Snowflake’s gross margin has been trending up as it scales. This was touched upon in last week’s earnings call, and management is targeting mid 70% gross margins over time.
Raimo Lenschow
Okay. Perfect. Hey. Thank you. Again, Mike, on the gross margins, I mean, we have seen the progress this year and you gave us guidance. Just talk a little bit about the drivers for the gross margin improvement we are going to expect in the coming year and what it is – like is it more the contracts with the cloud providers or what’s driving it going forward and what led to do for you to reach the long-term goals? Thank you.
Mike Scarpelli
Yeah. I would say, the contracts with the cloud provider started kicking in Q3 and we had the full benefit in Q4. I don’t anticipate renegotiating our cloud contracts next year. We may be in a situation at the end of the year, but I am not expecting that.
It’s really driven by getting more scale within our existing deployments. We have a number of deployments where we are not at scale and we see those ramping right now. As an example, like, Japan. Japan has been running at a negative gross margin, because we just don’t have very many customers but we are starting to ramp there that that will turn around and that’s just one example. We are in 20 deployments around the world and think of a deployment as a data center out places.
But also as we move higher up into larger enterprises they tend to buy our higher addition our business critical. Yes, those big customers require more discounting, but the margin – the contribution margin from those higher SKUs more than offset that discounting to drive gross margin, which gives us the confidence that we will get to those mid-70s, it’s not going to happen next year, but we see that continued gradual improvement.
https://seekingalpha.com/article/4411279-snowflake-inc-s-sno…
Mike
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I’ve been emailing Mekong about this topic of Gross Margins. The topic of Product Gross Margins and non-product gross margins came up.
Saul wrote a little bit about Snowflake’s use of the term Product Revenue and Product Gross Margins last month. I hope I’m not taking this out of context too much:
Product Revenue is a key metric for us because we recognize revenue based on platform consumption, which is variable at our customers’ discretion, and not based on contract terms. Customers have the flexibility to consume more than their contracted capacity during the contract term and may have the ability to roll over unused capacity to future periods. Our consumption-based business model distinguishes us from subscription-based software companies that generally recognize revenue ratably over the contract term and may not permit rollover. Because customers have flexibility in the timing of their consumption, the amount of product revenue recognized in a given period is an important indicator of customer satisfaction and the value derived from our platform. Product revenue excludes professional services and other revenue.
Saul – Product Revenue seems roughly the equivalent of when a SaaS company gives subscription revenue (also excluding service and other revenue
Regarding Gaap vs Non-Gaap Snowflake uses the standard explaination I seem to have seen before:
Our non-GAAP product gross profit and operating income (loss) measures exclude the effect of stock-based compensation expense-related charges, including employer payroll tax-related items on employee stock transactions, amortization of acquired intangibles, and expenses associated with acquisitions and strategic investments. We believe the presentation of operating results that exclude these non-cash or non-recurring items provides useful supplemental information to investors and facilitates the analysis of our operating results and comparison of operating results across reporting periods.
I don’t believe this is any different than any of our other companies.
Is there any reason for me to not compare Snowflakes Product GM to other Saas companies Subscription revenue Gross Margins. And if not then when we talk about Snowflakes Non-Gaap Gross Margins are we then agreeing that they were 70% this last quarter?
Thanks,
Jason
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I didn’t realize it, but they already break it out, it’s on the quarterly press release. Go towards the end of the document where they have the big table with the heading “GAAP to Non GAAP Reconciliation”. They show $12m of revenue, and $19m of cost of revenue, so a -$7 million negative gross margin on the non-product business.
My notes from Q4 Conference Call:
- Total Revenue - $190.5M - 117% YoY growth and 19.3% QoQ
- Product Revenue - $178.3M - 116% YoY growth and 20% QoQ
So, $12Million in other revenue even with horribly negative margins puts that $12M at 6% of total revenue and 6.7% of Product Revenue (Product revenue being, IMO, the equivalent of Subscription revenue).
Does anyone expect this non-product revenue to increase as a percent of Product revenue for any reason?
Best,
Jason
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