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In the summer of this year I called the situation and valuation of Snowflake (NYSE:SNOW) still very demanding. At the time, Snowflake was seeing continued topline sales momentum, as operating leverage had come to a standstill, creating a tough set-up for the company and its shares which had fallen alongside the wider technology market at the time.
Naturally being appealed to big falls in share prices, I lacked conviction to initiate a position amidst a still very elevated valuation.
The Thesis
Snowflake is essentially an artificial intelligence provider as its positioning to reimagine data management for cloud solutions makes for an enormous addressable market. This comes as the promise of Snowflake is to provide seamless access, organization and sharing of data, to thereby unlock the real value of this data.
The company believes that data silo forming prevents companies from extracting the real value of such data. The company focuses on its WAAS system, standing for warehouse-as-a-service, and unlike the traditional SAAS business models, revenues are tied to actual consumption instead of fixed subscription fees, creating the right incentives for parties involved.
Founded a decade ago, the company went public at $120 in 2020, some 50% above the preliminary offering price. Shares rallied to the $300 mark on the first day of trading and, following some volatility in 2020 and 2021, shares hit a high around the $400 mark a year ago.
It is hard to image, but the company only generated $265 million in sales in 2019, as operating losses of $358 million far exceeded the revenue base. That was an understatement of the actual performance, as the company posted revenues at a run rate of a billion already at the time of the IPO. This was based on the quarterly revenue numbers and accounting for the increase in revenue performance obligations.
Fiscal 2022 results, revealed in March of this year, showed that fourth quarter revenues rose 101% to $384 million, for a run rate of $1.5 billion. A $2.6 billion remaining performance obligation number doubled from a year before, for realistic bookings around $2.8 billion. With 309 million shares trading at $200 in the spring, a $58 billion valuation (after reducing the valuation by $4 billion to account of for net cash balances) worked down to a 20 times sales multiple. This was still nosebleed high, but has come down a bit already, as >100% growth rates remain impressive.
In May, Snowflake posted an 85% increase in first quarter release to $422 million, as operating losses actually increased to $189 million, halting the improvement on the bottom line as growth came down a bit. A $3 billion realistic revenue rate at $150 per share worked down to a 15 times sales multiple, too high for me given the sign of the times and the continued losses.
What Now?
After looking at Snowflake around the $150 mark this past summer, shares have been trading range bound between $120 and $200, now trading at $150 per share again.
In August, Snowflake posted an 83% increase in second quarter product sales to $466 million (with reported revenues at $497 million) as remaining performance obligations rose by a similar percentage. GAAP operating losses rose (on a sequential basis) to $207 million, due to an important extent the result of stock-based compensation, which results in continued dilution of the shareholder base. For the third quarter, the company guided for product revenues between $500 and $505 million, up 60-62% from the year before, with non-GAAP operating margins seen at 2%.
Third quarter product revenues rose 67% to $523 million, with revenues coming in ahead of the guidance, despite the tougher comparables and impact of a stronger dollar, as total revenues were reported at $557 million. Operating losses (GAAP) of $206 million were largely similar to the first and second quarter, making modest operating leverage again as these losses are gradually falling in relation to reported sales. Non-GAAP operating profits of $43 million translated into margins of around 8%, far ahead of the guidance, yet $235 million in quarterly stock-based compensation expenses are responsible for almost all the discrepancy between the adjusted and GAAP numbers.
Fourth quarter product revenues are seen between $535 and $540 million, which marks sequential growth on that basis, and this could be conservative. Less promising is that adjusted operating margins are seen at 1% of sales, marking deleverage in the margin guidance. With revenues trending at $2.2 billion already and the increase in the remaining performance obligations amounting to $1.2 billion on an annual basis here, the sum of revenues and increase in remaining performance obligations comes in close to $3.4 billion.
The 320 million shares now trade at $150, for a $48 billion equity valuation, a number which falls to $43 billion and change after factoring in a net cash position of $4.8 billion. This translates into a valuation of around 12 times sales, as very modest operating leverage is seen (again), but only very moderately. This is achieved in a tougher environment which includes inflationary pressures, weaker business spending and less forgiving equity markets, etc.
Not Getting Involved
Given the current valuations, I am cautious on the shares here but continue to be impressed with the nature of the solutions and topline sales growth. This leaves me to reiterate my neutral stance from this summer, albeit that the first sign of stabilizing net losses are comforting, but too early for me to get really involved here with the stock.
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