The amount of data collected from businesses and other entities since the creation of the digital age is immense and measured in zettabytes. One zettabyte is equal to 1 billion terabytes. The total amount of data created, captured, copied and consumed globally was approximately 64 zettabytes in 2020 and is forecasted to grow to 180 zettabytes by 2025
One of the leaders in the field of organizing and structuring all this data is Snowflake Inc. (SNOW, Financial), a data lake, warehousing and sharing company. Snowflake’s data lake stores unstructured and semi-structured data that can then be used in analytics to create insights stored in its data warehouse. The company’s data sharing capability allows enterprises to easily buy and consume data almost instantaneously compared with a traditional process that can take weeks or months. All of its data solutions can be hosted on major public clouds such as Amazon's (AMZN, Financial) AWS and Microsoft's (MSFT, Financial) Azure.
Snowflake’s corporate mission is a world with unlimited access to governed data, so every business and organization can handle the immense challenges in this digital and advanced technology world.
The company went public in September 2020 at $120 per share, yet opened at $245. The stock hit a high of $392 in November 2021 and has declined 65% since then. The market capitalization is currently $44 billion.
Snowflake platform
The company’s core platform takes data that is unstructured, semi-structured, structured or streaming and puts it through its intelligent infrastructure, elastic performance engine and optimized storage processes. The outcomes provide insights, predictions, monetization and other data products to its end customers.
Snowflake provides these services to the financial services, technology, media, retail and health care industries.
Examples of customer usage include a software company running and monetizing its application using on-platform, usage-based billing or comprehensive Covid-19 data being available live on Snowflake Marketplace from open data providers. Other examples include taking financial data, which can be purchased and accessed immediately without data pipelines, and the creation of efficient collaboration privately between defined groups of suppliers, partners or other business units.
Financial review
Top-line growth rates have never been a problem for the company since its founding. The company grew its revenue base 106% in fiscal year 2022. Revenue increased 67% in the third quarter of fiscal 2023 to $557 million, with remaining performance obligations (backlog) increasing 66% to $3 billion. The company now has 7,292 customers, with 287 of those customers having 12-month product revenue greater than $1 million.
The problem for Snowflake has always been if it can make any profits. So far in its history, the company has not and has an accumulated deficit of $2.5 billion as of the end of the third quarter. The operating loss was $206 million and the net loss was $200.9 million. The company plays the non-GAAP stock-based compensation game and is claiming positive earnings per share of 11 cents for the quarter. Stock compensation for the period was $235 million, which is a stunning 42% of revenue.
The company’s balance sheet remains strong after multiple capital raises and free cash flow generation. Cash on the balance sheet stood at $4.9 billion at quarter end and the company had no debt.
Valuation
Snowflake does not have a positive price-earnings ratio at this time and, on a non-GAAP basis, the forward price-earnings ratio is a meaningless 265 times. The company sells at about 20 times revenue compared to a sector average of two to three times.
The GuruFocus discounted cash flow calculator is difficult to utilize because of the absence of positive earnings. Using next year's non-GAAP earnings per share estimates of 53 cents, the current share price is showing 50% earnings growth over the next 10 years.
The company currently does not pay a dividend and does not plan to for the foreseeable future. It has also not repurchased shares recently, which is probably sensible at these valuation levels.
Guru trades
Gurus who have purchased Snowflake stock recently include Baillie Gifford (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). Investors who have reduced or sold out of their positions include Spiros Segalas (Trades, Portfolio), Catherine Wood (Trades, Portfolio), and Frank Sands (Trades, Portfolio).
Conclusion
Snowflake's unique cloud platform that enables its customers to eliminate data silos and overhead is a strong growth engine for the foreseeable future. The addressable market for big data is potentially over $248 billion according to the company and growing rapidly. The largest of these is data warehouse and data lake opportunities, which may be valued at $173 billion.
The company did note a slowdown in customer spending. Three of the top 10 customers showed sequential declines in data consumption due to a variety of reasons. Other slowdowns include the SMB segment, the Asia-Pacific Japan region and the technology vertical.
However, the high-growth factors are more than priced in to today’s stock price and the extreme valuation levels provide no margin of safety in case the company stumbles. I believe Snowflake needs to earn a positive return on capital on a GAAP basis or it will continue to destroy shareholder value.
